Markets quiet to start Budget week

High st banks vs currency brokers

There is a definite feeling that markets have turned a corner in the past few weeks following the finalisation of the Greek debt swap and the continual positive data from the US. Equities have remained buoyant in the past few weeks with the FTSE attempting to crack the 6,000 level for the first time since last July.

The “turning of the corner” has led to volatility in FX markets slipping somewhat in the past few weeks with most G10 crosses, except those involving JPY, conforming to recent trends and trading ranges. This leads us to believe that a “break-out” in global markets will happen soon; it’s just a case of which way. For our money we would have to say equities coming lower, bonds remaining strong and the dollar returning to “safe-haven” status.

A possible catalyst for this shift lower is the continual chatter around oil prices and the prospects that the situation could end up in some form of conflict. Oil has remained bid as a result of that while also being capped by inflation expectations and the likelihood that more supply could be called on at any time (from the US’s Strategic Petroleum Reserve to Saudi Arabia cranking open the taps a little wider). It is our belief that this, conflict apart, will probably be the high that we see in oil for the near term.

It of course remains a significant danger to the recovery. We have seen higher oil prices already be expressed through the latest round of producer price inflation and this will flow through to consumer prices in the coming few months if the price doesn’t slip from these record levels soon.

Inflation has finally started to fall in the UK after remaining above target since late 2009 and with the slowing of price increases a certain sigh of relief came from the Old Lady of Threadneedle Street and her inhabitants. Unfortunately, any increase in prices as a result of problems in oil markets will stymie efforts by the Bank of England to keep monetary policy “loose” or supportive of consumer demand. A choice between inflation and economic growth could once again be needed.

This is not just a British problem of course. Inflation is exacerbating the problems of the weakest more than most economic phenomena and Europe is likely to remain in recession through the remainder of 2012. However, the European Central Bank suffers from a very peculiar phobia. While the Bank of England was happy to let inflation print double its target through the recession, the ECB decided that they must battle rising prices via increasing interest rates. They did so in 2008 and once again 2011. In both instances these rate rises destroyed consumer spending in the Eurozone and were quickly reversed once policy makers realised this.

It’s a busy week for UK interests with CPI on Tuesday, the Budget on Wednesday and Retail Sales. Data from the UK economy has definitely started to slip a little in the past month and a poor retail sales figure will see come lower in to the end of the week. The Budget is always a political animal’s feast with little for us in markets to chew on but it will be interesting to see what plans George Osborne has to help the UK’s SMEs.

Today’s data calendar is quiet with currencies likely to track movements in commodities and equities throughout the session.

Indicative Rates Sell Buy
GBPEUR 1.2025 1.2051
GBPUSD 1.5814 1.5839
EURUSD 1.3135 1.3158
GBPJPY 131.37 131.65
GBPAUD 1.4948 1.4975
GBPNZD 1.9200 1.9226
GBPCAD 1.5700 1.5729
NZDUSD 0.8217 0.8249
GBPZAR 11.98 12.03
USDZAR 7.5688 7.5985
GBPPLN 4.9583 4.9884
EURJPY 109.12 109.38

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Markets quiet to start Budget week

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