The next UK Budget is due Wednesday 22 November, ahead of this there are reports that Chancellor Hammond is set to lose a significant amount of his fiscal wiggle room following an update from the Office for Budget Responsibility (OBR) on some the numbers that underpin their fiscal projections that feed into the Chancellor’s Budget plans. The reports are that as much as two thirds of the £26bn margin that the Chancellor had saved himself as a ‘Brexit buffer’ are set to be eroded. One key assumption change for the OBR has been on its estimates of UK productivity growth, which is expected to revise down significantly. That of course will imply less scope for fiscal giveaways in the Budget in just over a month’s time.

Yesterday evening Ian McCafferty, an advocate of raising bank rate since June, said his MPC colleagues had been “waiting for further evidence” before voting for an increase, but added he thought their “earlier fears of the risks of a sharper slowdown have diminished”. McCafferty also added the Bank should only consider unwinding the massive pile of assets amassed under quantitative easing “some time” after bank rate has risen “several times”. The MPC's position has been that QE unwind should not start until Bank Rate, currently at 0.25%, is raised up to 2.0%; but McCafferty did not cite the 2.0% figure, instead leaving it vaguer as to how soon unwinding could begin. In a speech at the Company of Founders, McCafferty also said that there was little the MPC could do to reverse Brexit effects but it could factor in its impact on business and consumer confidence.

The US Dollar moved over a cent against the Pound yesterday as FED members shared their thoughts on economic performance and forward guidance on prospective central bank policies. The main comments came from Philadelphia FED’s Patrick Harker. Harker shared his thoughts on the upcoming and much anticipated appointment for the next FED chair. He noted the importance of having a deep understanding of the economy and markets in order to lead the Fed. Harker, who is currently an FOMC voting member, also echoed the sentiments of other FED members on topics such as employment and inflation. Harker said that he expects unemployment to decline below 4%, and sees inflation rising to 2 percent. Most notably Harker told CNBC he’s ‘pencilled in’ an interest rate rise in December as well as three hikes next year. The Dollar move was further supported by comment yesterday evening from Kansas City FED’s Esther George; she also mentioned the need for further gradual interest rate hikes and discuss the risks that may arise from waiting too long to raise rates.

Further afield, the Australian Dollar fell 0.7% overnight as the RBA’s Ian Harper gave an interview to the Wall Street Journal. He said the RBA is still not ruling out a rate cut despite lower than expected retail sales data. He said that "The thing that is causing an issue for us [the RBA board] is slow growth in wages, which is feeding into slow growth in household income, if you start to lose that momentum that might be the basis of some sort of policy action." AUDUSD has moved to the lowest point in 3 months moving from 0.81 to 0.77. 

The day ahead

Data is relatively thin on the ground today and we expect the market to continue be driven by sentiment towards political instability in the UK. This is newspapers are continuing to report that Theresa May will be replaced. This afternoon the US release is the usually hotly anticipated Non-Farm Payrolls. However due to recent Hurricanes the figure is likely to be overlooked. It will still be closely watched as there is, of course, always a chance the figure exceeds expectations and helps extend Dollar gains. 

Thought of the day

With a performance that underscored the very meaning of ‘just getting the job done’, England’s football team have qualified for the 2018 World Cup in Russia. In a game in which most commentators struggled to find any positives and fans spent most of the second amusing themselves playing with paper aeroplanes, the team did at least ensure their presence in the competition next year. Scotland also kept their qualifying hopes alive by beating Slovakia 1-0 and by benefitting from the England result. A win on Sunday could take them through to the play offs and potential world cup qualification for the first time in 20 years. Although Northern Ireland lost to Germany, they remain well placed to make November’s playoffs as well. Away from the sporting world and back to the world of FX markets, ‘getting the job done’ and taking the excitement/uncertainty out of the day to day is probably the best strategy to employ! Get in touch with the Investec dealing desk to discuss ways to help ensure your business doesn’t lose ground on the competition.