Over to you Darling…

Yes today is the pre-election budget which Alistair Darling will unveil to the House of Commons this afternoon. So what can we expect from Mr Darling today? Will he be specific and open about how the government plan to reduce the deficit by half within 4 years? Very unlikely…today is the last chance saloon for Labour to dance around the realities and focus upon trying to get re-elected. Expect to see bashing of financial institutions and for Darling to drum homethe point that early cuts or the Conservative policy could spin the economy back into recession. One item that would help this argument and sterling is the expectation of the announcement that the government borrowing forecasts are expected to be revised down from 178 billion…depending on how much it is revised down will be key for sterling. I would expect to see the budget on this basis to be slightly sterling positive as the financial markets do not expect clear plans on reducing the deficit- the post election budget will be much more relevant for this regard.

Sterling softened a little yesterday on the news that inflation softened a touch- this indicates that inflation pressure is lessening and thus reduces the call for monetary policy tightening.  It also validates for now that a weaker pound is not leading to inflationary pressure…thus there is scope for it to be pushed further. 

Today we have seen the euro trip through to an May 2009 low at 1.3340 against the USD…the catalyst was again uncertainty with Greece coupled with news that Fitch has downgraded Portugal’s long term default rating from AA to AA-, with outlook negative. The Swiss Franc has hit new all time highs against the euro and currently sits in the low 1.42’s….with imminent intervention not likely we could see further CHF gains.

report by Phil McHugh

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