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Markets relieved by lack of surprise in Budget

David Jones
As far as financial markets were concerned, the emergency Budget came in pretty much as had been telegraphed over the previous few weeks.

With George Osborne starting by saying that this was going to be a “tough but fair” Budget that was ultimately “unavoidable”, the tone was set right from the off.

It is fair to say that it is still a fine balancing act to make these sort of changes without
affecting the fragile economic recovery – and this was highlighted by the forecast of unemployment to peak at 8.1 per cent and the lowering of growth forecasts for both this year and next.

The expectation that inflation would still be up at 2.7 per cent by the end of this year
could still present further financial challenges in future quarters. For the early part of this
year the assumption had been that inflation would reduce – but we have not seen much of
that recently and it could prove to be another difficult balancing act for policy makers to
keep this under control, without pulling the rug out from under the recovery.

When it came to trading over the Budget, it proved difficult to get any early insight into direction, with the market displaying the usual manic-depressive tendencies as the data was digested. Always a good barometer as to what markets think of the state of the nations’ health, the pound against the dollar (GBP/USD) couldn’t quite make its mind up whether the speech was good or bad as the chancellor delivered it.

But, an hour after he had sat down, GBP/USD was trading around 100 points higher – maybe the real test will be whether it can build on these gains in the days ahead.

After the hung parliament, it is a relief to many of us to finally get this Budget out of the way as there had been an element of being stuck in limbo in recent weeks. Markets can now get back to focusing on the slightly bigger picture from here as to how sustainable the global recovery is. There are plenty of hurdles still along the way – it can’t be just me who thinks the European debt situation has gone a little quiet in recent weeks, so there is a risk of that raising its head again in the months ahead. But reaction so far suggests that the Budget delivered roughly what markets had been expecting – and, for the short term at least, has served to reassure the City that we are at the beginning of the journey to cut the UK deficit.

David Jones is chief market strategist at IG Index.