Given that the Chancellor has engaged in the now obligatory routine of leaking almost the entire Budget ahead of the actual speech, there seems little chance of much excitement for sterling. A slight increase in UK growth forecasts from the Office for Budgetary Responsibility will be welcome news, but Osborne remains acutely aware that the confidence of bond markets depends on him remaining prudent, so real surprises are probably out of the question. He will likely stick to a cautious optimism, painting as broadly upbeat a picture as he can, while remaining careful to put as much of the blame as possible on the last government. In sum, I suspect that sterling will remain stuck within the trading range in which it has resided for February and March, and while economic data is unlikely to produce any nasty surprises, it’s hardly likely to get any better in the near term. Whatever happens, everyone knows that the UK economy is uncomfortably dependant on the Eurozone crisis, and while that has gone away for now, it could just as quickly return, particularly if Portugal looks to be going the way of Greece. Ultimately, more of the same is probably the best that can be said for both the Budget and sterling.
If anything, Wednesday’s budget would do well to adapt measures to ease burden on consumers in a bid to increase spending.
From a technical perspective, sterling has seen decent support around the €0.8270/€0.8280 area against the euro, while recently the 55-day moving average is capping gains around the €0.8350 level. Strong resistance at €0.8400/€0.8425 may stop euro strength in its tracks. Complacency that the Eurozone issues have been put to bed is ill-advised and any shocks could see January’s lows around €0.8220-0.8225 back in our sights.
Against the dollar, the pound has making great headway to break out of its narrowing range and while trading above the 200-day moving average, there is cause to expect the pound to retest this year's highs at $1.5990 should a sustained break above secondary resistance at $1.5930 be witnessed.
I’d expect the pair to be quite choppy however, and a failure to break to the upside could see a move below $1.5600/1.5610 could then see the $1.5500/$1.5510 area as a target. If equity markets decline, a distinct possibility, particularly if China stops short of a soft landing then a rush to the safe haven dollar could easily see sterling pare the recent gains.
The battle between the great British pound and the continent’s single currency has been raging for the last few years, with the sterling-euro exchange rate ranging between €1.0200 and €1.2400. Ever since we saw sterling collapse against the euro during the credit crunch of 2007 and the banking crisis of 2008 – when at one point it looked like we might actually see parity between sterling-euro – currency traders have been torn between the lesser of two evils, as both are suffering from low growth prospects and crippling debts.
Since the Eurozone crisis really escalated, investors have hardly been flooding back into sterling as a safe haven and since it is unlikely that the Bank of England will be raising interest rates anytime soon, we could continue to see this narrow trading range for sometime to come.
Tuesday’s inflation data came in higher than expectations, but the Bank of England is no longer interested in price rises as if it was it would have hiked the base rate by now. Until we see lower unemployment and stronger growth it’s unlikely that we’ll see sterling-euro return to the dizzy heights of €1.5000 any time soon.
Markets tend to ignore the budget, and rather categorise it as political jostling. However, if anything will see some movement during the chancellor’s speech it will be sterling. The pound has been performing fairly well over the course of the last three months without really setting the world on fire. It has almost been a case of the three ugly sisters yet again, with the euro, the US dollar and the pound fighting for the title. With yesterday’s inflation figure giving mixed signals sterling will be looking for some clarity from the chancellor this afternoon. However, if the growth, borrowing and inflation forecasts come away from expectations, we could well see the pound testing levels on the downside. Monday’s close above the 200-day moving average for cable once again brings the $1.6000 level back into focus and the highs this year at $1.5990 – this is where the chancellor’s numbers can cause some issues. On the downside, last week’s low at $1.5610 and 50 per cent retracement of the entire up move from the $1.5240 lows to the $1.5990 highs remains a key support. A break below $1.5610 argues for further weakness towards $1.5530, the 61.8 per cent level of the same move as well as $1.5420.