GBP will hope Hunt avoids repeat of Sept. mini-budgetGrowth-boosting measures will be keyMorgan Stanley says GBP can benefit if supply issues addressedBarclays says no lift for GBP likely, as BoE set on dovish path

Above: The Chancellor Jeremy Hunt prepares for the Spring Budget with his team at No11 Downing Street. Photo by Zara Farrar / HM Treasury.

There will be some giveaways in Budget 2023, but "no helping hand for Sterling" says strategists at Barclays as they judge the scale of any fiscal boost will not prod the Bank of England into a more proactive stance on interest rates.

The budget forms the week's second major domestic event for the British Pound which has rallied against the Euro and Dollar since Monday, aided by some stronger-than-expected jobs figures on Tuesday and the evolving market reaction to the collapse of Silicon Valley Bank (SVB) in the U.S.

The UK Chancellor Jeremy Hunt is expected to announce an improved fiscal outlook and estimates suggest he will have an additional £30BN to disburse, which could boost the UK economy and sentiment amongst consumers and businesses.

The 2023 budget follows on from September's now illustrious 'mini-budget' of Liz Truss and Kwasi Kwarteng which sent the Pound hurtling lower and served as a reminder that these events can still have an impact on currency markets.

Hunt's fiscal statement of November 17 meanwhile succeeded in recovering the UK's fiscal credibility and the Pound to Dollar exchange rate has rallied 17% since its September 2022 nadir.

The Pound to Euro exchange rate has meanwhile recovered 4.5% from its lows.

Analysts at Morgan Stanely say any impact on the Pound would depend on the mix of initiatives announced.

"We don't think that the spring budget statement will be a game-changer for GBP, but an announcement of more supply-side initiatives could bring some further near-term support to the currency," says Wanting Low, currency strategist at Morgan Stanley.

Hunt will be keen to boost the economy's supply potential by supporting business investment and the supply of labour, particularly given the UK's worker shortage since the pandemic.

Rumours that reforms to childcare, pensions and back-to-work schemes will be forthcoming would boost supply if they succeed in getting mothers, older workers and the long-term sick back into work.

"Hunt believes that childcare is key to unlocking growth," writes Steven Swinford, Political Editor at The Times.

Under leaked plans, free childcare will be available to all parents of children aged one and two provided they earn less than £100K each and both parents work 16 hours a week.

At present, the 30 hours of free childcare offer is available only to parents of those aged three and four.

"There is expected to be a focus on improving the supply side of the economy, including measures to boost labour force participation targeted in areas such as pensions reform and childcare. Reports also suggest that measures to increase investment spending, important to drive up productivity growth, are being considered," says Rhys Herbert, Economist at Lloyds Bank.

The Pound could show some immediate responses to the nature of the latest forecasts issued by the Office for Budget Responsibility, with economists looking for some upgrades to the growth outlook to be forthcoming.

Image courtesy of Lloyds Bank.

No Boost for the Pound: Barclays

"In theory, fiscal expansions should be beneficial for a currency, in so far as they lift the domestic interest rate and encourage capital inflows," says Lefteris Farmakis, an analyst with Barclays.

But, Farmakis says for the Pound to benefit the Bank of England would have to respond to the fiscal boost by raising interest rates (increased money supply can be inflationary), thereby nurturing a boost to bond yields that would typically underscore demand for the Pound.

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The budget comes amidst diminishing expectations for the scale of future Bank of England interest rate hikes, helped greatly by guidance from Governor Andrew Bailey that suggested the end of the cycle was nearing.

However, expectations for a pause on March 23 were further bolstered by the collapse of SVB, which has seen investors bet the Federal Reserve will leave interest rates on hold on March 22.

Where the Fed goes the BoE often follows, particularly when set on a 'dovish' path.

"Following a series of reluctant hikes, however, the central bank pivoted in a dovish direction in February and looks set to remain on that path," says Farmakis.

"In all likelihood, the fiscal expansion in question is too small to shift the BoE’s stance meaningfully closer to the current terminal rate pricing of c.5%, if at all. This shortfall adds to downside risks for the pound, as it has done throughout the BoE's reactive tightening cycle to date," says the analyst.