Pound Drops With Gilts After Hammond Budget, U.K. Issuance Plans

  • Chancellor emphazises U.K. well placed to weather challenges
  • DMO to sell more longer-dated gilts than forecast in 2017-18

Two Reasons Why Sterling Could Go Lower

The pound stayed lower against the dollar and gilts extended their losses after U.K. Chancellor of the Exchequer Philip Hammond presented his first budget as Britain prepares to exit the European Union.

The gilt curve steepened after the Debt Management Office said long-dated sales for the 2017-18 fiscal year will be slightly above economists’ expectations. That came as the DMO said it would sell 115.1 billion pounds ($140 billion) of gilts in the year starting April, the lowest since the financial crisis but still above the 109.7 billion-pound median prediction in a Bloomberg survey of primary dealers.

The U.K. budget failed to offer support for the pound, which fell to a seven-week low earlier Wednesday and remains 2017’s worst-performing major currency. Sterling and gilts were also dragged lower after a private report showed U.S. companies added the most workers in almost three years in February.

Live Coverage: U.K. Budget 2017 Announcement

  • While the Office for Budget Responsibility’s 2017 growth forecast was revised up to 2 percent from the 1.4 percent predicted in November, it was still below the 2.2 percent forecast a year ago before Britain voted to quit the bloc. The institution reduced its growth forecasts for 2018 and beyond
  • “The Chancellor has lived up to his reputation for fiscal conservatism and is pressing ahead with a tough fiscal tightening in order to create scope to loosen policy if the economy struggles after Brexit,” Samuel Tombs, chief U.K. economist at Pantheon Macroeconomics, wrote in a note
    • The OBR “is making no provision for any severance payment that the U.K. might need to make upon leaving the EU. As a result, the Chancellor’s “fiscal headroom” likely will turn out to be much smaller than he envisages currently”
  • The U.K.’s Brexit process was further complicated this week after Prime Minister Theresa May lost a second vote in the House of Lords over the conditions to her draft bill, setting the stage for likely tussles before Article 50 can be invoked.
  • GBP/USD falls 0.3% to 1.2165 after a 0.7% decline during the past two sessions. The pair touched a fresh seven-week low of 1.2139 earlier
  • U.K. 10-year gilt yield climbs 4bps to 1.23%, five-year yields rise 2bps to 0.60%
  • The U.K. will sell GBP23.3b at long gilt auctions as well as GBP9b in long-dated gilt syndications; adds up to GBP32.3b (vs median estimate of 31.9b in Bloomberg survey)
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