Earlier today, Chancellor George Osborne opened the Autumn Statement claiming that, although it is taking time, the “British economy is healing”. This comment was met with laughs of derision from the opposition benches. Indeed, it seems that Mr Osborne was attempting to open on a light note in order to lighten some bad news – namely that economic growth for this year is predicted to be -0.1% in 2012, down from 0.8% as predicted in the Budget earlier this year. But how will this news affect the exchange rates as we reach the end of the year?
Obviously, the immediate news for sterling rates isn’t great. As I am typing this, the sterling rate stands at a month-long low against the euro. Simon Eastman from Currency Index Ltd says – “George Osborne admitting failure to cut UK debt and reducing the outlook for economic growth, was never going to go well. As we anticipated, sterling lost value against most major currencies. “ However, with regards to the euro, it reached this level before the Chancellor even began speaking. It seems that the negative news in the statement came as no surprise whatsoever, and the investors responded adequately. In a sense, we should be grateful for this. If the negative news came as a complete shock, we would currently be seeing the rate of sterling plummeting through the floor. We must also remember that it isn’t all bad news. The statement also announced that the basic state pension was to rise by 2.5% next year, and most working-age benefits are to rise by 1%. This will no doubt be seen as an indication that the UK economy isn’t completely dead, something the government will do well to remind people, unless they want to see the value of sterling continue to drop.
In the short-term, it is unlikely the value of the pound will take a massive hit off this news. There are, however, concerns for the future. It now seems more and more likely that at least one of the ratings agencies will downgrade the UK’s top credit rating, something a few analysts believe should have happened already. There is also, of course, the shadow of Quantitative Easing which may occur as a direct response to this. As those who closely watch the markets will be aware, QE always causes the value of sterling to drop, and there appears to be a small, but consistent, demand for it at the Bank Of England policy meetings. The results of the Autumn Statement may well provide the stimulus for this voice to grow, and subject the economy to another round of easing.
What we must remember, however, is that compared to other major currencies, sterling is in a relatively secure position. The dollar has to worry about the ‘fiscal cliff’ next month, and the amount of problems the euro has to contend with could fill several books. Over here, economists and investors have to be very careful in the short term, as the autumn statement, and the fallout from it, will almost certainly be a chaotic time for the sterling rates.
Steven Walsh is a Sales Executive at Currency Index who helps its clients transfer money abroad and provides them with insight on the Forex market as well.