Sterling starts the week close to its recent long-term highs against the euro and 4.5% stronger than a year ago. After dropping some 7% since September, GBP/USD is back to where it was this week in 2023.
The big picture from data in the UK last week was of a clear pre- and post-budget split. Retail sales before the budget sank by 0.7% but consumer confidence rose sharply post-budget. Meanwhile the business community clearly sees the budget unfavourably. The Purchasing Managers’ Index (PMI) dropped like a stone, as bosses viewed the rise in national Insurance payments and minimum wage and cancelled hiring plans. Services PMI is at its lowest for a year at 50, well below the anticipated 52.
This view was confirmed by the Confederation of British Industry (CBI) this morning. The business lobby group said that half of businesses were cutting jobs and two-thirds were scaling back hiring.
Another threat is the potential rise in inflation and, with it, higher interest rates (or at least higher for longer). Shares in the UK’s six biggest housebuilders have fallen by 18% since the budget.
European business is equally subdued as it considers potential tariffs from the US following the presidential election. Almost all the main eurozone economies recorded contracting PMI. French services PMI, for example, fell from 49.2 last month to 45.7 this month.
There are warnings that the euro could sink even lower against the US dollar – to below parity according to Deutsche Bank – as a strong new Trump administration meets a Europe with lame-duck leadership in both Germany and France. Monetary policy could also be set to diverge, with the US Federal Reserve now expected to cut its main interest rate by half that of Europe.
So, as Rachel Reeves continues having to defend her budget, is there any good news to report from it? Yes! The FT reports that British people spending at ten years of their retirement overseas could avoid a chunk of inheritance tax (IHT). Changes in the ‘non-dom’ rules mean that if you spend ten years overseas you will no longer face 40% IHT on your global wealth. If you are considering moving overseas, check out Smart Currency’s partner, Your Overseas Home. Could this be the best new IHT tactic now that farmland is no longer the opportunity it was?
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