GBP/USD steadies close to 1.3950 ahead of UK budget announcement on Wednesday

• GBP/USD is currently consolidating around the 1.3950 mark amid thin trading volumes
• The UK budget is to be revealed tomorrow and will be the main event of the day for GBP.
• Recent reports from the FT suggest a longer than expected extension to UK Covid-19 support programmes like the furlough scheme.

GBP/USD is currently consolidating around the 1.3950 mark amid thin trading volumes with the Wednesday Asia Pacific session yet to get into full flow. Recent news that UK Finance Minister Rishi Sunak is set to extend Covid-19 support further than expected has not impacted FX markets at all but may support GBP as volumes pick up in the coming hours. As a reminder, the budget is set to be revealed tomorrow; Sunak will be delivering a speech before parliament after PMQs likely to start around 12:30GMT. GBP/USD closed Tuesday trade with modest 0.2% gains, having recovered from early European session lows of just above the 1.3850 mark to current levels around 1.3950.

Budget Expectations Update

The FT just came out with a new report suggesting that UK Finance Minister Rishi Sunak is set to extend a vast package of Covid-19 support until the end of September, which, as the articles says, Sunak hopes will nurse the UK economy back to economic health by the autumn. Note that prior to this FT article, markets had been expecting Covid-19 support (i.e. the furlough scheme aimed at keeping employees in their jobs and the £20 per week enhancement to universal credit payments) to be extended until June. Reportedly, the Sunak wants to avoid a “jobs cliff-edge” that removing the furlough scheme too soon might cause.

As a reminder, as reported by UK press over the weekend, the budget is set to contain three distinct “phases”. Phase One is mainly about ongoing Covid-19 support schemes, which are set to be extended to June (furlough, business rates relief and VAT reductions, stamp duty holiday and “bounce back loans”). Phase Two is going to be about some fiscal injection to accelerate the post-Covid-19 recovery (£5B “restart” fund for giving small business grants, a £22B national infrastructure bank and aid for first-time homebuyers). Phase Three is going to be about paying for everything and is likely to entail freezing income tax rates and a modest increase to corporation tax. UK press, citing leaked excerpts of Sunak’s speech, expects the UK Finance Minister to say that “once we are on the way to recovery, we will need to begin fixing the public finances and I want to be honest today about our plans to do that”.