Pound struggles higher as IFS issues budget warning

The pound was able to struggle higher versus the euro and US dollar yesterday, although some gloomy predictions for the state of UK finances over the coming years slowed progress.

Sterling is inching higher this morning. GBP/EUR is currently at €1.1294, while GBP/USD is trending at US$1.3977. The GBP/AUD exchange rate is up 0.3% to AU$1.7770, GBP/NZD is trending at NZ$1.9094, and GBP/CAD is currently at C$1.8103.

Read on to see what a leading UK think tank thought of the recent economic forecasts, and what impact its response had upon the pound…

What’s been happening?

The GBP/EUR and GBP/USD exchange rates managed to climb higher yesterday, although progress was far from smooth.

The pound is facing strong headwinds after several UK think tanks released their responses to Tuesday’s Spring Budget Statement from Chancellor of the Exchequer Philip Hammond.

The Institute of Fiscal Studies (IFS) claimed that Hammond will need to find an additional £14 billion a year from 2019 onwards in order to avoid a fall in the spending to national income ratio, with a total of £30 billion a year likely needed in order to balance the budget and return public coffers to surplus.

The IFS concluded that this extra revenue would have to come from tax hikes, causing the pound to waver around midday before finding its feet again towards the end of the London session.

GBP/EUR was able to strengthen thanks to another cautious speech from European Central Bank (ECB) President Mario Draghi, who claims that interest rates should rise at a measured pace once quantitative easing has ended.

Draghi is due to step down towards the end of 2019, but some commentators are concerned that his dovish rhetoric could cement a gloomy policy outlook and therefore make it hard, if not impossible, for his successor to adopt a more rapid pace of monetary tightening without causing significant volatility for the euro, stocks and bonds.

A surprise decline of -0.1% for US retail sales during February had little impact upon the US dollar, although GBP/USD was still able to make gains yesterday.

It’s only a week until the Federal Open Market Committee (FOMC) is expected to announce a 0.25% hike to interest rates, so markets were more focused on the upside potential for the US dollar.

What’s coming up?

It’s a fairly sparse economic data calendar all round today, which could leave the pound, euro, and US dollar trading in response to long-term outlooks.

There is nothing at all set for release from the UK, while the only development for the Eurozone will be a speech from ECB official Sabine Lautenschläger, who could give the euro boost if she exhibits her traditional hawkishness.

US initial and continuing jobless claims figures may cause a flutter for the GBP/USD exchange rate, but with markets expecting monetary policy changes next week, these figures are unlikely to have much of an impact.