UK borrowing figures beat expectations and boost pound

UK government borrowing figures yesterday beat forecasts and showed the lowest borrowing for an August since the financial crisis.

GBP/EUR has dropped -0.3% to €1.1339, while GBP/USD is holding steady at US$1.3580. The pound has fallen by -0.2% against the commodity trio, with GBP/AUD at A$1.7082, GBP/NZD at NZ$1.8565 and GBP/CAD at C$1.6695.

Theresa May delivers her long-awaited Brexit speech today. Read on to see what the markets are looking for, and how the pound could react…

What’s been happening?

Better-than-expected government borrowing figures for August boosted the pound yesterday, with public sector spending racking up a smaller deficit than economists had predicted.

Spending was expected to fall from a surplus to a deficit of £6.4 billion, but the government only reported a shortfall of -£5.1 billion. This was in part because July’s surplus – caused by the deadline for self-assessed income tax payments – was revised higher to £1.3 billion.

The deficit last month was the smallest shortfall recorded for an August since the financial crisis, while year-to-date borrowing was £200 million lower than the same time last year. This all boosted expectations that the Bank of England (BoE) will be able to raise interest rates in the near future.

The latest European Central Bank (ECB) Economic Bulletin suggested that the currently high euro exchange rates are still unfavourable from an economic point of view, causing markets to sell out of EUR. Better-than-expected Eurozone consumer confidence figures for September provided the euro with some support after the index climbed from -1.5 to -1.2 in the afternoon.

GBP/USD was able to trend higher yesterday, despite the fact markets had reacted positively to the Federal Reserve’s latest policy meeting. US policymakers announced the start of balance sheet tapering and signalled that there would be another rate hike before 2017 was through.

What's coming up?

The biggest mover for Sterling today will be Prime Minister Theresa May’s speech on Brexit. Markets are hoping she will indicate a softening approach to the negotiations that may make the EU more inclined to relax some of their red lines regarding freedom of movement and access to the single market. However, if May’s speech is nothing more than a face-saving exercise the pound could fall sharply.

Amongst the slew of Eurozone PMIs today are speeches and round table appearances from ECB President Mario Draghi and Vice President Vitor Constancio. Markets will be interested to see if they acknowledge the Fed’s recent policy decisions and how that might impact the ECB’s plans for tapering its own quantitative easing programme.

The US data calendar is fairly quiet, with the Markit PMIs having less of an influence than their European iterations. Fed official John Williams will speak this morning at a Swiss National Bank event; Esther George and Robert Kaplan are due to speak at a US oil conference this afternoon. All three policymakers may drop some hints regarding the outlook for interest rates.

We’re here to talk currency whenever you need us, so get in touch if you want to know more about the latest news or how it could impact your currency transfers.

Phil McHugh,
Trading Floor Manager

Phil provides dealing and hedging services whilst also helping to manage Currencies Direct overall market exposure.