Chancellor Set to Walk a Tightrope

Although the UK Chancellor is likely to pursue the currently practised austerity agenda in the budget scheduled later today, the government may offer some leeway to the existing monetary policy framework in order to address Britain’s growth worries. Meanwhile, minutes of the BoE’s last policy meeting showed that the majority of MPC members remained less inclined toward further stimulus amid simmering inflationary pressures. With the US poised to maintain the pace of asset purchases in today’s meeting, the Fed’s economic forecasts are expected to set the trend in currency markets. Across Europe, the Cypriot Parliament overwhelmingly rejected a key condition for the bailout deal, thereby reigniting fears of its insolvency.

Pound Sterling – UK Markets

The crisis unfolding in Cyprus helped Sterling to garner traction against the common currency in yesterday’s trading session. The Pound has continued to remain on a firm footing against the Euro this morning ahead of the annual budget due later today. The minutes of the BoE’s last monetary policy meeting, just released, has revealed that MPC members voted 6-3 to keep asset purchases unchanged. Meanwhile, labour market data continues to defy the perilous economic situation experienced in the UK, as data just out has indicated that the number of people claiming jobless benefits continued to drift lower for February. With stubbornly high inflation complicating the central bank's task of balancing inflation and growth, markets will be closely watching the UK budget for cues in gauging whether the Chancellor unveils fresh plans permitting the BoE to adopt a flexible inflation target. With the UK economy expecting growth supporting initiatives from the Chancellor, markets will look to how he balances growth enhancing measures with deficit reduction efforts.

US Dollar – US Markets

The Cypriot Parliament has put the nation’s bailout plan in jeopardy, prompting investors to flock to safe haven currencies in yesterday’s trading session. However, with the US Dollar trading almost flat against the Euro this morning, it remains to be seen what the FOMC meeting has in store for the greenback in today’s session. Most market attention will hover around the Fed’s monetary policy outcome and future economic projections due later today. Despite a string of encouraging economic data, markets believe that the central bank is likely to hold fire amid looming concerns on the fiscal front. Additionally, the accompanying Fed Chairman’s post meeting press conference will be closely scrutinised for a pro-stimulus message. On the domestic front, building permits and housing starts climbed more than expected for February, thereby adding to signs of progress in the housing market that has helped to boost the economy. Against the backdrop of a recent improvement in macro conditions, any indication from the Fed to prematurely withdraw stimulus measures may prove to be positive for the US Dollar in today’s trading session.

Euro – European Markets

An unexpected rise in German confidence indices garnered muted response, as the Cypriot Parliament’s rejection of an unprecedented levy on bank deposits continued to weigh on risk appetite. The common currency lost ground and traded below the 1.29 mark against the US Dollar yesterday. The Cypriot rejection of the proposal, a pre-condition that was required to qualify for a vital international bailout, has left investors jittery and increased the risk of the nation exiting from the European bloc. Meanwhile, in a last minute attempt to look for alternative ways to fund its part of bailout, the nation’s finance minister has flown to Russia to plead for aid. With political turmoil in Italy and uncertainty surrounding the Cyprus bailout rocking financial markets, data released yesterday indicated that Eurozone economic sentiment dipped for March. Nevertheless Germany, Eurozone’s largest economy, continues to weather dismal economic conditions as German investor confidence unexpectedly rose to a three-year high for March. With Cypriot leaders scheduled to meet later today for further negotiations, market sentiment is likely to remain subdued in today’s session.

Other Currencies – Highlights

The Canadian Dollar has failed to register gains against the US Dollar in today’s trading session as disappointing Canadian manufacturing sales update yesterday, coupled with ongoing tensions in Cyprus, prompted traders to shun high yield currencies. Data out yesterday revealed that manufacturing sales in Canada surprisingly declined for January. Moreover, wholesales sales rose less than expected, thereby signalling a slowdown in Canadian economic growth. On the macro front, markets are keeping a close eye on the Canadian house price data due later today. Going forward, the outcome of the Fed’s monetary policy meeting later today and Canadian retail sales figures due tomorrow may sway market sentiment. The Fed’s decision to continue with its current monetary stance and an expected rebound in Canadian retail sales could likely prove positive for the Canadian Dollar in the near term. Additionally, risk appetite will also be influenced by events unfolding in Cyprus.