The pound has corrected lower after the sharp gain recorded on Wednesday and this makes a lot of sense to economists at MUFG Bank as the outlook remains gruesome for the sterling. GBP failed to respond to more fiscal action as British Finance Minister Rishi Sunak came to the rescue again with a new Job Support Scheme.
Key quotes
“We have flagged downside risks given the negotiations on a new trade deal may well go to the final hours with periods of concern mixed in which will fuel intermittent speculation of no deal. While that isn’t likely to fuel sharp selling, we believed based on where GBP is trading, risks were skewed to the downside. Certainly, Wednesday’s confirmation to restart talks was good news but there is still a way to go yet in negotiations.”
“The new Job Support Scheme due to commence on November 1 will now look more like the expensive Job Retention Scheme. Workers can qualify if working just 20% of usual hours rather than the planned third and crucially, companies will now only have to fork out 5% of employees’ wages instead of the planned 33%.”
“Taking OBR estimates and the verbal estimates from the government on the cost of the new scheme, the UK budget deficit is heading for over 20% of GDP. Last week, the IMF released budget deficit estimates which had an estimate for the UK at -16.5% with only the US (-18.7%) and Canada (-19.9%) expected to run larger deficits. Of course other countries are going to have to increase government spending again due to the second wave of COVID-19 but the UK is heading for being the worst or very close to the worst advanced country. FX is all about the relative, and on that basis, running close to the largest budget deficit while recording the largest economic contraction due to COVID-19 and with trade frictions set for the new year, the outlook for GBP remains grim.”
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