Pre Budget report & effect on exchange rates

Good Morning. Today is very important for the currency markets, as we have the pre budget report for the UK along with some other important measures of the economy. We'll look at this in detail in a moment. First as usual, a snapshot of where rates stand. This is likely to be very different by the end of the day:

Before we look at today's data, we'll review what happened yesterday. The pound weakened over fears over our financial health. We also saw industrial Production and Manufacturing production figures come in much worse than expected. This caused the pound to fall.

So, if the pound fell, why did GBP/EUR rates go up?
Well this is more to do with the Euro than Sterling. We saw Fitch the credit reference agency reduce Greeces’ credit rating, weakening the Euro. The pound is still very weak, and it was the bad news from the EU that weakened the Euro and caused rates to climb slightly. Today the focus will be on UK fiscal health.

Pre Budget Report
What is it? Each year the chancellor delivers two reports to MPs, updating them on the state of the economy and planned fiscal changes. The pre-Budget report (PBR) takes place in the autumn with the Budget each spring. This year's PBR will be Mr Darling's third since he became chancellor in June 2007 and, with an election imminent, his most important.

Mr Darling will update MPs on his latest forecasts for the economy, which has been in recession for more than a year. He is expected to say the economy will shrink 4.75% this year, which is a more severe contraction than the 3.5% drop predicted in April.

He will probably also stand by forecasts for growth in 2010 of between 1% and 1.5%. Many economists also expect him to revise upwards his forecast for borrowing this year from the £175bn predicted in April's Budget.

The banking crisis and the recession have had a severe impact on the public finances but ministers say they are committed to halving the budget deficit, the gap between revenue and spending, by 2013.

The problem is that the governor of the Bank of England said recently the UK has no real plan to repay the huge deficit. The gloomy forecast expected today could well hit the pound very hard. If they announce huge measures to repay the debt then this will weaken Sterling. If they don't spell out a clear plan, this also will be bad news. So, it's hard to see how the pound can benefit from today's reports.

He wants to demonstrate that the government is serious about cutting Britain's spiralling budget deficit by a half in four years, whilst at the same time preserving spending on programmes designed to support an economic recovery and front-line services. I don't think we'll see a clear plan on how this will happen, and with the credit agencies hovering over major economies at the moment with the risk of reducing credit ratings, I think the pound is in for a rocky day.

Here's a great animation by the BBC on the problems facing Darling.

UK Bank Bonuses
A tax on bankers' bonuses is expected to form the centrepiece of Alistair Darling's pre-Budget report. Banks will face a 50% levy on bonuses above a level of about £20,000. This is nothing to do with money, and all to do with politics. The public have been baying for blood in the wake of the financial meltdown. Now they have got it, but at what price?

Finance is one of our biggest exports. This will make the UK a very unattractive place to do business, and we could see an exodus of our best banking minds. In my view this is short sighted, will raise little revenue, and is little more than political points scoring, at the cost of the economy.

Other Data Today
UK - Nationwide Consumer Confidence
Ger - Consumer Price Index
UK - Trade Balance
NZ - Interest Rate Decision

Check our twitter updates for news throughout the day, and of course we'll have a detailed report right here on our blog tomorrow, reviewing what effect the PBR has on the currency markets.

Those that would prefer not to take a risk on their currency costing more as a result of possible Sterling weakness should consider a Forward contract to protect against a downturn.

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