The British pound showed no significant reaction to the government’s announcement of an additional £15 billion of fiscal stimulus, leading HSBC analysts to suggest that the move at least prevented the currency from falling further.

Key sterling pairs were virtually immobile after Chancellor of the Exchequer Rishi Sunak announced an expansion of spending aimed at mitigating the impact of rising energy prices on households.

“The pound’s lack of reaction to the government’s £15 billion package of support for households is telling,” says Daragh Maher, head of research for the Americas at HSBC.

“The prospect of additional aid could be seen as a positive for the British pound, boosting spending and allowing the Bank of England to focus on raising interest rates to reduce inflation,” he says. “However, the British pound hasn’t done much.”

The pound to euro exchange rate did fall after the announcement, but Pound Sterling Live believes this was more due to the broad rally in the euro.

The Pound to Dollar exchange rate rose slightly, but the Dollar exchange rate was broadly unchanged.

In fact, there were very few individual movements in any of the major pound exchange rates.

Moreover, money markets showed that investor expectations for UK interest rates for the year ahead were actually down slightly from before the announcement, according to HSBC.

HSBC said structural issues, such as a widening budget deficit or the obstacles to FDI that the income tax could create, could offset any cyclical gains in the pound.

“It is also likely that this new fiscal impetus has simply prevented the market from recognizing that its price forecasts for a Bank of England rate hike may be too aggressive. This has allowed the status quo to be maintained for the time being,” says Maher.

Money markets show that investors are expecting around 100 more basis points of rate hikes in 2022, which must be met for the pound to remain at current levels.

If this figure falls as investors realize that the Bank of England is going to pause the rate hike cycle, the pound will fall.

So the stimulus provided by the Bank may actually just reinforce current expectations, weakening the downside potential for sterling.

“It looks like the pound needs this fiscal help just to stand still,” says Maher.

Pound Sterling Live reports that following the Chancellor’s spending announcement, the pound could still benefit from the decision if consumer confidence improves as a result.

The GfK Consumer Confidence Index fell two points to -40 in May, the lowest reading since records began in 1974.

This is significant for the UK economy as it is driven by the consumer-oriented service sector.

What’s good for consumer confidence is good for the economy and therefore good for sterling.

If households believe that their personal situation has improved as a result of measures announced by the government, then we may have seen a low in consumer confidence in May.

But economic surveys reflecting any changes in consumer sentiment and behavior following the Chancellor’s announcements are still at least a month away, meaning the tide of deteriorating sentiment towards the UK and the pound may not turn until the end of June.