24/11/16 - Positive Budget Pushes GBP Higher

GBP

Sterling surged to a 10-week high against the euro and resisted the dramatic falls against the dollar suffered by other major currencies after a UK budget read as doing more than had been expected to bolster growth in years to come.

At the heart of the sterling rally was a rocketing of long-dated gilt yields after Chancellor of the Exchequer Philip Hammond ramped up his forecasts for government borrowing to the tune of an extra 122 billion pounds over the next five years.

Down by almost a fifth against the dollar over the past year, sterling has proven more resilient since the start of October, helped by signs the economy is doing better than many economists had feared after June's vote to leave the EU. Nevertheless, Sterling has struggled to push on since, and analysts are still divided over the broader outlook for the currency heading into the formal launch of Brexit talks next year.

 

USD

The dollar surged to a more than 13-year peak on Wednesday, bolstered by upbeat U.S. economic data that showed the economy on track for steady growth and reinforced expectations of interest rate increases by the Federal Reserve next month and in 2017.

The greenback also posted sharp gains against the yen, rising to a more than seven-month high, and climbed versus the euro to its highest since early December.

A 0.4 percent rebound in U.S. durable goods orders last month after a decline in September as well as solid U.S. jobless claims that have been below 300,000 for 90 straight weeks boosted the multiple rate hike view.
 

EUR

On Dec. 4, Italian citizens will vote in a referendum on whether to overhaul their national constitution, which probably has to be amended if Prime Minister Matteo Renzi is going to push badly needed economic reforms through the country's complicated law-making process.

The vote is widely seen as determining Renzi's political fate, and he may resign if a "no" vote prevails. Opinion polls show most Italians opposing the proposed constitutional changes, which economists say Italy desperately needs if it's going to streamline its government and spark growth.

Italian banks have been under pressure because of a high number of nonperforming loans they're holding, and their worries about whether they can recapitalise. According to the International Monetary Fund, Italian banks hold roughly $400 billion in troubled loans. Currently, the six worst-performing stocks in the European banking index are all Italian.

Although the contribution of Italy to the Eurozone as a whole is limited; the issues faced by Italy and Italian banks highlight the wider wholesale issues faced by many similar European countries.
 

Key Announcements

09.00 – EUR – German IFO Business Climate; Forecast at 110.6 against a previous of 110.5