Market Insight: UK investors in limbo ahead of budget | REUTERS

[Music] investors assess the economic implications of Sterling hit 2-year High welcome to Market Insight I'm ludovica Bola Sterling has hit its highest level against the dollar since March 20122 supported by stronger than predicted economic data and optimism that the new labor government may lead to a period of political stability and as the US Federal Reserve prepares to cut rates more aggressively than the Bank of England will Sterling keep strengthening and if so what would the implications be for the UK's economy well to help answer all that and more I'm joined by Vicki price chief economic advisor at the center for economics and business research thank you very much for being with us today right so let's start off in the UK what are the implications of starmer's speech yesterday for the UK economy as you say investment intentions seem to be in some sort of limbo until more clarity is given in the forthcoming budget what's happening well absolutely I mean what we've heard is uh speech by KISS tamama so kiss tamama the Prime Minister saying that things are going to get worse before they get better soan keeps fingers cross that indeed they will get better but I think what he's suggesting is that they're going to be some tough measures coming out of the uh budget in October the 30th which really people have been expecting now for some time particularly since the chancel of the ex Rachel Reeves made her own initial statement to the House of Commons uh saying that they had discovered this 22 billion black hole in finances and certainly for this year and therefore there would be some measures taken or some measures have already been announced um uh including the um re review if you like of who is going to be getting a winter fuel payments among pensioners so that's going to be restricted quite significantly from here on so ways in which can reduce perhaps this 22 billion black hole somehow um and there will be more so um what investors are saying right now is that we're going to have to wait a little bit and see what comes out of the budget because of course if there are changes in capital gains tax or corporation tax or any other areas that affect businesses directly uh or even wealth taxes which might affect willingness of people to a be in this country and B to invest here um what happens also on the equity front because there will be from what we understand uh a change in the way in which any uh capital gains that are made um by private Equity when their own money is involved will be taxed as income tax possibly so there are all sorts of suggestions which are inhibiting right now from what we understand from surveys people's willingness to invest and meanwhile in the UK we are noticing some serious Sterling strength and or dollar weakness right is that set to continue given that the the bank of England might not cut rates at the same Pace as the FED now it's really interesting that this is happening because on the one hand what it tells the bank of England is that uh perhaps with the exchange rate being so high the inflation worries are less and maybe we can cut rates but on the other what the markets are now looking at is more a dollar weakness which is that um because uh there is now increased pressure for the FED to reduce rates simply by more than b it originally possibly 50 basic Point basis points in September rather than the 0. 25% that people expected earlier uh a cut anyway will happen and maybe more Cuts following um there is an inbu do dollar weakness in there which benefits the pound up to a point and might actually strangely enough allow the UK to cut rates you know faster than would otherwise be the case what where the balance on the exchange rate is going to end up um is a big question mark but it is really all based on interest rate expectations from both sides of the Atlantic right let's get to Germany now because CPI is out tomorrow and are you expecting the disinflationary trend that we've seen to continue and if so what would this mean for the ECB then well again you know the contrasting Trends uh what we've got of course in the US is the possibility of rates being cut more um than it been a disp originally because of unemployment issues or employment issues being an issue but there are serious problems of course in in Germany as well where we've seen unemployment go up um and we're also seeing of course inflation it was still quite close to Target I mean it's true that it had gone up in July to 2.3 from 2.2 but frankly that's pretty pretty close to the Target uh the expectation is that it could actually be slightly lower um for August we're getting the flash estimates as you suggested pretty pretty soon um and the Zone generally might see a reduction as well from the 2.6 to possibly 2.5 even lower uh percent for August if that is the case then the ECB May well um react with a cut a second cut of course because we had one back in June uh in September um and that will be welcom certainly by the biggest uh you strongest country anyway uh or at least wealthiest country so far uh in Europe so Germany will benefit from that and I think there is continuous pressure to ease monetary uh policy and I think that will probably happen so German indicators are very significant and Manufacturing for example has been in Decline for quite some time the latest data for August for the PMI suggests that it's Fallen further the next big Market Catalyst writes nvidia's results and that would be Market moving to say say the least what are you really expecting on that front I mean good results some pull back in the stock maybe is simply just a continuation of what we've seen so far well we've seen the stock being quite volatile but uh the expectations now are that the results will be quite good when they're announced later today that of course affects hugely the entire US market and I mean the tech sector is so important there had been suggestions that perhaps um investors had become less uh enamored by AI but I think when we see the figures we might see that this is in fact not the case but uh a lot of anticipation ahead thank you very much Vicky price from the CBR thanks for your thoughts and that's your Market Insight don't forget you can watch more videos on rs.com