UK’s spending review set to reduce deficit by 3% of GDP by the end of this government’s term

The UK's comprehensive spending review yesterday outlined spending that was announced in the 22nd June emergency budget, as the Chancellor stayed the course in terms of the plans for reducing spending.

The spending plans, taken together with the tax increases scheduled to kick in in 2011, are set to reduce the deficit to approximately 3% of GDP by the end of this government's term in office. This should help to protect the UK's sovereign debt rating, keep borrowing rates down for government and business and should allow the Bank of England to keep easy monetary conditions.

On the foreign exchange market Sterling was initially boosted by the announcement, but that support started to wane as the figures were already known so, all in all, the spending announcement came and went with little more than a wimper as far as the currencies were concerned.

Somewhat overshadowed by the Chancellor was the Bank of England minutes from the 7th October meeting which showed a 3-way split vote. MPC member Posen voted to increase QE by £50bn; MPC member Sentance continued to vote for a hike of 0.25% in interest rates while the rest of the Committee voted for no change. Most members "stood ready to alter the policy stance in either direction" if required and some felt that the chances that further stimulus would be needed had increased in recent months. The November Inflation Report was seen as a good time to more thoroughly evaluate the outlook for activity and inflation.

In the US, the Fed's Beige Book increased the prospects for more quantitative easing being brought in during November with the US Dollar sold off as the news broke. With the US Dollar being sold, investors put their money back into the Euro, pushing the Euro v Dollar back through €/$1.40 which in turn strengthened the Euro against Sterling below £/€1.13.

The move by the Euro hasn't been taken particularly seriously by the markets as the move isn't supported by the fundamentals. It is expected that the Dollar will regain these and past losses against Sterling and the Euro with possibly poor UK retail sales figures for September the catalyst for this process to re-ignite.

Releases of leading activity indicators from the Eurozone and US, along with UK retail sales, dominate the agenda today ahead of the G20 finance ministers meetings on Friday and Saturday.