The first England match on Saturday showed how early optimism can be stopped in its tracks at the first reality check, and today's report from the Office of Budget Responsibility (OBR) is also likely to provide a reality check to the Government's previously wildly optimistic growth figures. The OBR is a body set up to provide independent figures on the economy, in an attempt to stop future governments using statistics to push their own narrative through a budget, much like the last government have done. The figures for growth released from the last government have been widely derided for some time, with the forecasts predicting that growth for next year would by 3.25%, when the average growth rate in the 10 years before the recession was just under 3%, and as the government released no minority reports, or probabilities in their forecast, the markets had to take on trust that is genuinely what the government thought would happen. Today's forecasts are likely to be much more pessimistic, and this will give the government the backing they need before next weeks budget, which will bring some deep cuts to public spending.
Last week saw a resurgence in risk appetite as very good Chinese trade data was followed, by a successful Spanish bond auction, and the collapse of a legal challenge in Germany to the Eurozone bailout package. Over the week the Pound made some gains against both the Dollar and the Euro, although Friday saw a surprise fall in US retail figures which did depress the markets at the end of the week. The soft figures brought the Pound down to almost 1.45 against the Dollar, and even down below 1.20 against the Euro late on Friday, although it seems over the weekend the markets have regained some calm, and the Pound has rallied over 1c against the Dollar, and managed to regain 1.20 against the Euro. At least part of the Pound's recovery has come from some comments from a MPC member on the prospects for inflation that raise the possibility that the outlook for interest rates are not as dovish as the markets expect.
The big event for the UK today will be the OBR report at 10am, the markets have already discounted the previous unrealistic figures from the government, although when they get just how bad things are spelled out to them line by line, it may weigh on the Pound throughout today, although it is unlikely to provide any lasting damage. There is also the Eurozone industrial production data released this morning which may provide some upside surprises, if it follows the decent data coming out of Germany, and this could provide the single currency a boost, even though it has already recovered to touch 1.22 against the Dollar this morning. The underlying problems have not gone away in the Eurozone so it unlikely the Euro will move significantly higher, and any gains may be short lived.
Posted in Daily Market News on May 30 2014