The FTSE has started the day on the front foot as economic output showed signs of stabilization and ahead of the spring budget. Banks are leading the tax on the FTSE, while the pound only trades at $ 1.40 ahead of Chancellor Rishi Sunak’s performance. Sunak finds himself in the enviable situation where he needs to support the British economy through pandemic recovery while public debt rises to a high level after the war.
The Chancellor has promised to do everything necessary to support the economy out of the crisis. A significant expansion of fiscal support measures such as the furlough scheme, VAT reductions and assistance to homebuyers is expected. The goal is to save the economy. However, concerns about sky-high debt cannot be swept completely under the rug. A small increase in corporation tax from 19% – a low level by European standards – is also more than likely. While we do not expect Sunak to make major moves on companies, he is likely to outline a timetable for ongoing increases as economic growth picks up.
UK service sector activity is running out
After a sharp drop in economic output in January, things are starting to look up for the UK economy. Economic production stabilized in February, although many companies continued to suffer from lockdown restrictions.
The PMI UK services sector for February posted 49.5 – a downward revision from the initial reading of 49.7, but significantly higher than January 39.5. The service sector contracted at a much slower pace than last month, although the fact that it became a contract highlights that face-to-face business, travel and tourism and the hotel industry continued to struggle.
FX – Pound looks to budget
GBP / USD – The pound is trading just under USD 1.40 before budget release. A slight positive push for sterling could be on the cards given the supportive fiscal measures expected by Chancellor. This combined with the BoE’s move away from negative interest rates and passive stance to higher interest rates could well see the pound strength against USD1.45 as we move towards summer.
However, signs of a heavy hand in terms of tax increases or spending cuts can pull sterling down rapidly.
The US dollar remains stable as bond yields continue to stabilize at around 1.40% and the optimistic sentiment also keeps demand for the safe haven subdued. Investors will look forward to important releases today for further direction ahead of NFP.