UK Budget Down and Dirty

UK gilts and the British pound have suffered in the wake of the Darling's budget presentation. The UK faces a difficult situation and sterling weakness is the path of least resistance.

Even though Darling forecast a lower borrowing need, the Debt Management Office suggested somewhat greater supply than expected (GBP187.3 bln vs this year's GBP225.1 bln). Progress on reducing the deficit seem slow compared to plans of the other weaker credits in Europe. This year's 11.8% deficit will be reduced to 11.1% next year and in 2014/15 be at 4%. Moreover, with the end of QE, the BOE won't be absorbing any of it.

Local interests may dominate the headlines of tomorrow's broadsheets, like the stamp duty, university assistance, etc, but the global markets seem to be focused on supply, slow efforts to reduce the deficit and the fact that Darling reduced the government's growth forecast for next year to 3-3.5% from 3.25%-3.75%. This may still be too optimistic. Note that the EC forecasts less than 2% growth in the UK next year, which is slightly lower than the Bloomberg consensus.

While the euro has fallen to new lows for the move today, sterling has not, though it is straddling the $1.49 level. If support near $1.4875 holds, sterling can recover toward $1.4950, but with FTSE and gilts under-performing, additional sterling losses are a matter of time.