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Steering through Brexit

For sterling at least, the main focus today will be with the Autumn Statement. Traditionally this was an opportunity to announce revised growth and borrowing forecasts for the years ahead, but more recently has turned into something of a mini-budget in itself. The economy has held up well since the Brexit vote in June, but remember that the UK has not yet started the process, so both the government and BoE recognise that there is a considerable period of uncertainty ahead. There have been some mixed messages from the government so far. The new Chancellor, Phillip Hammond, has relaxed the previous commitment to balance the budget by 2020, but has also acknowledged that the low rate environment provides an opportunity for expanding infrastructure investment. The reaction to Trump’s victory in the US also provides some food for thought for the UK government. Seemingly, markets have reacted well to the prospect of some longer-term fiscal expansion (even though this remains just a prospect), so this may not go un-noticed.

But the difference between here and the US is what is happening to the economy. The OBR will downgrade growth for next year, probably halving the 2.2% forecast that was published back in March. The issue is that we are likely to see future years lower as well, so there are going to be difficult decisions to be made. How much will borrowing be allowed to rise, how much will taxes have to rise and how much spending will need to be cut. There will be some headline infrastructure spending announcements, but the main thrust will still be belt tightening. Against this backdrop, sterling could well struggle to shine in the wake of the announcements today. The UK Chancellor starts his speech at 12:30 GMT. Before then, we have provisional PMI data through much of the Eurozone and then FOMC minutes this evening, which should not rock the boat given the strong expectations for a move in December which have been embedded even further in the past two weeks.

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