Bouncing back from last week’s poor UK unemployment figures
and Fitch’s downgrade to the UK’s rating outlook, the pound has made an
excellent start to the week. Taken against a basket of 13 major currencies, GBP
is trading at its strongest level in over a year. However, this morning’s
release of the minutes from the Monetary Policy Committee’s March meeting
represents a risk event for the pound.
The impact of this morning’s minutes on the pound will be
dictated by the tone struck with regard to the UK economy and the voting
pattern with regard to increasing the Bank of England’s ongoing quantitative
easing programme. Yesterday’s UK inflation data revealed a further decline in
price pressures to 3.4% (y/y), which highlights the scope for further QE should
the MPC feel it necessary. King has indicated that enough QE has been done but
the uncertain outlook for the UK economy will certainly keep UK data (such as
Thursday’s UK retail sales figure) in focus in the coming months. Nonetheless, the
slight uptrend in UK growth should improve the chances of a less dovish,
sterling-positive MPC minutes release.
The UK Annual Budget announcement from Chancellor George
Osborne will also be eyed closely on today. In light of Fitch’s warning that the
UK could lose its coveted AAA credit rating, Osborne is likely to ‘stick to his
guns’ with regard to his austerity programme.
GBP may benefit from some support if Osborne can convince
the markets that he can fuel UK growth amid ongoing belt-tightening. While
significant domestically, there may well have to be some major headlines out of
Osborne’s budget in order to cause much of a stir in the currency markets.
Sterling made another attempt at the $1.60 level on Monday
but once again fell short, which could signal another move lower for GBP/USD,
which currently trades just below $1.59. Against the euro, sterling is trading
firmly around €1.20, though once again progress is stalling at these levels
close to multi-month highs. With eurozone growth data likely to be weak on
Thursday, we continue to look for stronger GBP/EUR levels and lower GBP/USD
levels.
End
of week forecast
| GBP / EUR | 1.2075 |
| GBP / USD | 1.5675 |
| EUR / USD | 1.31 |
| GBP / AUD | 1.5250 |
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