Sterling slumps as June’s budget deficit hits four-year high

Forex

Britain’s budget deficit grew in the first three months of the tax year. The figures come in the midst of the UK leadership contest, but both Boris Johnson and Jeremy Hunt have committed to tax cuts and higher spending.

The figures had an immediate impact on sterling, which dropped 0.28 per cent against the dollar to 1.251 as economists warned the slump was a challenge for the incoming Prime Minister.

The UK’s budget deficit hit a four-year high for June at £7.2bn, almost double the £3.3bn for last year, the Office for National Statistics (ONS) revealed.

In the three months to June, borrowing was a third higher than the same period in 2018 in 17.9 billion pounds. Public sector net debt rose to £1.81 trillion, which is the equivalent of 83.1% of gross domestic product (GDP). June’s higher borrowing was linked to increased interest costs for inflation-linked government debt and higher spending on public services.

However, there was a “notable increase” in expenditure on goods and services, which reached £1.2bn.

The figures come as a blow for the leadership challenger, Johnson and Hunt, as it comes hot on the heels of economist predictions that their respective promises of tax cuts and increased spending could cost the economy tens of billions.

The pound tumbled in response to the news, in what has already been a shaky period for the currency. Sterling hit a 27-month low against the dollar earlier this month and slumped to a six-month low against the Euro. While much of its weakness is a result of the strong dollar, Brexit and economic uncertainty has plagued the pound.

Gold also pushed to a six-year high following the news, bouncing off the back of rising debt and falling interest rates. The last time gold traded this high for UK traders was summer 2011.

The pound tumbles; Carney trade wars warnings; Lagarde to lead ECB and better than expected NFP

Forex

With Brexit unknowns continuing to rumble away, it’s been a tough few months for sterling. The weakening pound hit a six-month low against the dollar today, which was buoyed by better than predicted US jobs report.

The figures come hot on the heels of Mark Carney’s speech on Tuesday in which he warned that trade tensions and Brexit uncertainty had the potential to “shipwreck” the global economy.

“Business confidence has fallen across the G7 to its lowest level in five years, with sentiment among manufacturers particularly weak. Households have also become gloomier about the general economic outlook, though they remain relatively upbeat about their own financial situation, likely reflecting robust labour markets. This is a similar pattern to that which emerged in the UK following the referendum,” he said.

He warned that policymakers were underestimating the impact of the ongoing US trade wars with China, Mexico and Europe. In his speech, he said trade tensions had significant downside risks for the UK economy, given it is already struggling under the Brexit quagmire. But he added that the global uncertainty has caused a “sharp slowdown” in global trade, manufacturing, production and capital good orders.

His comments caused gilts to rally and led to speculation of a BoE rate cute later this year, despite his claims that global markets are already pricing in more stimulus than is necessary.

Carney’s warning, alongside the weakening pound and sluggish growth in the first and second quarters, suggest that the BoE forecast for the UK economy next month could be grim reading.

Sterling lost more than 1% over the week against the dollar, and is heading for its ninth consecutive week of losses against the Euro. With little good news on the horizon, the outlook for the currency is bleak.

Lagarde new ECB president

Carney’s name just keeps popping up in the news this week, as he’s one of the contenders tipped to replace Christine Lagarde as the head of the IMF.

Mario Draghi steps down in October and Lagarde has been nominated to replace him. The nomination has surprised many, as Lagarde would be the first ECB president without any experience of setting central bank policy. She would also be the first female president of the ECB.

It’s a tough time to take over the ECB presidency, with pressure to improve growth across the Eurozone and – crucially – keep the area intact. It’s tough not to keep coming back to Brexit, but the UK’s disorganised and divisive split from the EU has done nothing to reduce calls for similar EU-exits from member states.

However, Lagarde is clearly no stranger to a challenging role, taking over as head of the IMF in 2011 when many countries were still struggling to overcome the effects of the financial crisis.

Investors must feel that she is a safe pair of hands, as the impact of the announcement on the markets was instant. The FTSE 100 closed up 0.7% at 7,609 points on the day the news broke, while the New York S&P 500 hit a record high as it moved closer to the 3,000 mark. There was almost palpable relief that a monetary hawk, such as Jens Weidmann from Germany, has not been handed the reins.

Non-Farm Payroll better than expected

Finally, the US got a boost in what is already a celebration week with better than expected Non Farm Payroll figures.

It showed that 224,000 jobs were created in June, many more than the 160,000 that economists had forecast. The figures are a rebound from the disappointing figures in May, and will be a relief to many worried about the economic outlook.

The Greenback strengthened on the (already weakening) pound following the figures, and EUR/USD is falling toward 1.1200 – the lowest in two weeks.

However, despite the impact on the dollar, investors would be wise to be cautious. Wage growth was disappointing compared to expectations and trade wars continue to cause tensions in global markets. Nevertheless, concerns of a recession may be over-egging it.

As Rewan Tremethick explains here, these figures have come just at the right time and show that the gap between market expectations, and what the economy actually needs, could be shrinking – just.

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