What Sunak's Budget Means for GBP

Chancellor Rishi Sunak on Thursday revealed plans to help Britons deal with inflation. The
markets reaction was a "meh";, but extra government spending (and debt) adds to GBP
uncertainty.

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The key figures

Chancellor Sunak presented his mini budget; plan on Thursday with concrete figures, and then
did the media rounds on Friday with a somewhat softer tone. But there are two important data
points for the markets; Sunak acknowledges that the package will have up to 1% impact on
inflation, and amounts to 1.5% of GDP.
Now, taking a politician at his word always carries a certain amount of risk, but this is
presumably the best case scenario; for the government. 1% inflation amounts to half of the
target inflation rate; meaning that the BOE will have to do just that much more to get inflation
under control. On the other hand, government spending counts towards GDP, meaning that a
technical recession is less likely in the near term. Which in turn could give the BOE some more
room to hike rates.

Now vs the future

The issue is that inflation is high because of increased spending during the pandemic. So,
increasing spending now to deal with inflation is a bit of a fight fire with fire; situation.
Politicians, of course, have to weigh the political benefit against the economic cost, and there
certainly are good arguments to help the homes that are most hit by higher prices. But more
disposable income in Britons hands simply means more inflationary pressure, even if the
Chancellor tries to dismiss it as minimal.

Minimal near term impact

The pound was largely unchanged following the announcement but due to a weaker dollar it
ended up closing indecisive after Thursday’s event. Across the week, the pound mounted a
strong rebound but largely thanks to a weaker USD.
The FTSE 100 underperformed among its European peers, as the threat of windfall taxes could
lower profits from large-cap index firms, but closed on a positive footing as risk appetite had
returned into the markets.

GBP/USD

Closing up on the 200-day average near $1.2880, the pair could experience a bit of a drawdown
before providing a clearer directional path. $1.2435 is the 50-day average, which acts as major
support.
If bulls recover the 200 SMA, $1.30 becomes an immediate target. Above there $1.3160 will be
offering the next level of resistance. But if the expected 200 SMA rejection leads to a bearish
price pattern, the downside could sweep the lows of $1.2155.
It’s worth noticing that the stochastic indicator reveals a ‘negative reversal’ where the indicator
made new highs but price did not.

Key takeaways

Chancellor Sunak’s mini budget is designed to boost the UK economy by 1.5% and have a 1%
impact on inflation, which will give the BOE the chance to raise rates. Although some argue
increasing government spending to deal with inflation is not a solution, there is a benefit for
those hit harder by the rising cost of living.