The pound could drop below $1.20 after next week's Budget

LONDON — Chancellor of the Exchequer Philip Hammond will unveil his first budget since taking the role last summer next week, and while it is set to be pretty low-key, it could set off fireworks in the financial markets.

Writing on Friday morning, Kathleen Brooks, research director at online brokerage City Index argues that depending on how markets interpret Hammond’s words and actions, the British pound could be in for a bumpy ride downwards.

“The UK Spring Budget is the next big event risk that could further knock the stuffing out of sterling,” said Brooks.

Hammond is not expected to pull any rabbits out of hats, as previous Chancellor George Osborne liked to, and the big fiscal stimulus that was touted by many pundits last summer is unlikely to manifest itself. That could be a problem for the pound, Brooks argues.

Here is the key extract from her research:

“The chief takeaway from this Budget could be how different our fiscal plans are to those in the US. The US markets and the dollar have rallied strongly on the back of hopes for a tax cut and big spending plan under the Trump administration, the UK government has very different ideas. If this contrast becomes stark on Wednesday, then it may trigger a sell-off in the pound, and 1.20 once again looks possible in GBP/USD. A break below here opens the way to 1.1840 — the low from last year’s flash crash.”

City Index’s stance that sterling could be set to take a leg lower is in line with that of strategists at Bank of America Merrill Lynch, who wrote on March 2 that the uncertainties that remain around Britain and the EU’s negotiating stances for Brexit will subdue the currency in the short term.

In February Deutsche Bank’s global co-head of FX research, George Saravelos said in an interview that the bank sees sterling falling another 16% to as low as 1.05 against the dollar, as the “incredibly complicated” nature of Brexit becomes ever more clear.

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