Budget UK preview: how will the markets react?

All eyes are on the Chancellor today from approx. 1230 GMT when he will deliver his second Budget of the year. As we have mentioned before, the Chancellor has been asked to do the impossible: boost spending in multiple departments, while at the same time sticking to the Tory government's self-imposed deficit reduction targets.

Below we take a look at the most market-moving parts of the Budget:

• Spending: if, as we expect, ‘Fiscal Phil' sticks to the deficit reduction plans and doesn't boost overall debt levels to try and lift growth then it is hard to see how this Budget can be good news for the pound. Sterling may struggle to break above the 1.3350 level – the top of GBP/USD's recent range – if the Chancellor does not deliver a pro-growth budget. Watch out for buy the rumour, sell the fact for sterling later today. The pound has rallied into this Budget and is up 0.5% so far this week, but things could turn sour later today.

• Budget Deficit: the widening budget deficit for October, public sector net borrowing rose by £7.5bn last month, a full £1bn more than expected and reversing a 6-month trend of lower borrowing figures, could also prove a headache for the Chancellor. If OBR forecasts revise down growth, as expected, and with some financial firms looking to leave the City next year ahead of Brexit, tax take could take a hit, leaving the Chancellor with even less wiggle room for pro-growth measures in this Budget.

• Economic Forecasts: the OBR is expected to revise 2017 GDP down to 1.6% from 2% and from 1.6% to 1.4% for 2018. Productivity forecasts are also expected to be lowered, which could reduce growth forecasts for the medium term to 1.5% or even lower out to 2020. The Chancellor needs to take a stand in this Budget, is it up to the government to boost productivity, or is it up to the firms' themselves? All of the baying from the largest UK firms looking for investment spending from the government to boost productivity are not proven to boost productivity. Far better would be incentives for firms to boost their own investment levels and to make equity investments more attractive rather than pure debt investments. If there are no tax measures to address this, expect UK asset prices to take a hit.

• Driverless cars and technology: this is one area that the government is expected to spend on. We mentioned before that this could be good news for Johnson Matthey, the beleaguered FTSE 100 company is a one of Europe's largest battery makers and a leader in clean air technology. However, it could also be good news for foreign firms including Google, the overall leader in the driverless car space, Volkswagen and Mercedes Benz, who are also ahead in terms of driverless car production. Will this play well with the Brexiteers' who may not want to see foreign firms, let alone European ones, benefit from this Budget?

• Housing: reform in this area is the centre piece of the Budget, but policy is likely to be a bit more radical than what we expect (i.e., freeing up the greenbelt) for this to have anything other than a small uplift for the UK's homebuilders' stock prices. Both Barratt and Persimmon, the UK's largest homebuilders, have seen their share price fall in November.

• Hammond's future: make no mistake, the biggest market-moving event from this Budget could be Hammond's own performance. Brexiteers are circling for his job, and this Budget is the battlefield for mounting Brexit tensions within the cabinet. If the Chancellor bombs then the knives will be out. If May is forced to sack her Chancellor in the aftermath of this Budget then this could be a big negative for the pound. Just last week the pound dropped 1.5% on rumours (unsubstantiated) in the Sunday Times that the Tory party were getting ready to oust May. If Hammond is forced out then May could find herself one step closer to the exit, which is likely to reinforce the political premium weighting on the pound. £1.30 ahead of the $1.2770 low from late August, could be on the cards if Hammond fails to put in the performance of his career and gets the chop before the week is out. Due to the week growth forecasts and other global headwinds (including US tax reform delays) a weak pound on the back of this Budget may not be enough to boost the FTSE 100 this time around.