UK annual consumer price inflation ticked higher for February, dampening the BoE’s scope to expand its balance sheet further. It would be interesting to see if above target inflation prompts a review of the UK inflation targeting regime. We believe that tomorrow’s annual budget and central bank’s minutes of the last monetary policy meeting will dictate the near term dynamics for the Pound.
In Europe, the outcome of today’s vote in the Cypriot Parliament on a plan to tax bank deposits is likely to be crucial for market sentiment. With the FOMC commencing its two day meeting today, an update on the US housing sector is unlikely to be a major distraction.
Pound Sterling – UK Markets
Bargain hunting in the Euro saw the Pound pare some of its gains against the common currency in yesterday’s trading session. However, Sterling has remained range bound against the both the Euro and the US Dollar this morning.
As expected data just out has indicated that annual consumer price inflation in the UK rose to 2.8% for February, far above the central bank’s 2% target, thereby fuelling speculation that the central bank might refrain from adding further stimulus. Moreover, the BoE rate setter, Ian McCafferty, in sync with the BoE Governor, has warned that a further fall in Sterling would risk stoking inflationary pressures and further weigh on economic growth. With the BoE recently hinting that monetary policy should also take into account the appalling state of the economy, minutes of the BoE’s latest monetary policy meeting due tomorrow would remain a key event on the market radar.
Additionally, markets anxiously await the UK annual budget due tomorrow. With little room to manoeuvre on the fiscal front, the expectation is that the Chancellor will overhaul the BoE’s annual mandate to give it more flexibility to tackle issues surrounding the UK economy.
US Dollar – US Markets
Traders have maintained a cautious stance ahead of today’s parliamentary vote on a proposed plan to tax Cypriot bank deposits, leading the greenback to hold its ground against the single currency in today’s trading session.
Meanwhile, traders will hold their breath as the FOMC commences its two day meeting later today. With few policy members voicing their concerns over the efficacy of current bond buying programme and with recent buoyancy observed in the labour market, tomorrow’s FOMC rate decision would be closely followed to decode whether hawks have outweighed doves in the monetary policy committee. Moreover, the Fed’s updated economic projections and the post-meeting press conference will hog the limelight.
On the macro front, despite a dip in NAHB housing market confidence index yesterday, an update on housing starts and building permits scheduled later today is likely to reiterate that recovery in the housing sector remains intact. Apart from housing data, market sentiment is likely to be swayed by developments taking place on the other side of the Atlantic.
Euro – European Markets
After a dreadful session yesterday that jolted global markets and raised fears of a new Eurozone debt crisis, the common currency has managed to recoup some of its earlier session losses and is trading in a tight range against the US Dollar and the Pound in today’s trading session. However, with the vote over proposed tax on Cyprus yet to be taken, the single currency is expected to remain vulnerable to a change in risk appetite. The decision remains on a knife edge, as the outcome will either secure the nation’s financial rescue or threaten default. We believe that any decision taken by the Cyproit Parliament would set a precedent for other larger fragile economies in the Eurozone.
In a move to calm market jitters, Euro-area finance ministers have urged the Cypriot government to spare small savers from the bank levy. ECB board member, Joerg Asmussen, offered some respite as he indicated that Cyprus can be given an option to amend the tough deal for the nation’s bailout. With the Eurozone economy facing a plethora of headwinds, today’s German and Eurozone ZEW confidence indices are likely to contribute to the negative trend.
Other Currencies – Highlights
The Australian Dollar is trading under pressure against the US Dollar this morning, generally hit by the “risk off” sentiment prevalent in markets amid uncertainty about the outcome of voting in Cyprus. Meanwhile, minutes of the RBA’s latest monetary policy revealed that there is a general sense among policy makers that although certain parts of the economy have started to respond, there is still a potential to lower interest rate further, if required. The Deputy Governor of the RBA, Philip Lowe, also supported the case of an improving domestic scenario as he opined that a stronger currency and higher savings rate have helped to stabilise the Australian economy. However, we feel that with the domestic inflation outlook remaining contained, the central bank has room to pursue with further accommodative monetary policy stance.
With most of risk appetite likely to be determined from news flow emanating from Cyprus, markets would also keep an eye on the Australian leading economic index scheduled later today for further cues.
BoE less likely to increase interest rates in May
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Sterling slumps after lower than expected CPI results