Osborne Tries a Balancing Act

As widely expected, the UK annual budget offered more flexibility to the BoE while dealing with inflationary problems, in a bid to support the ailing economy. Investors were in for a surprise as the nation’s 2013 economic growth forecast was halved and no alterations were made to the government’s borrowing programme. The budget also portrayed a mildly populist stance as it provided sops to homebuyers, increased personal tax allowance and lowered corporation tax. With Cyprus not out of the woods yet, today’s manufacturing PMI data across Europe has disappointed investors and does not bode well for the future. However, the Fed struck the right chord as it reiterated its commitment to continue with its ultra loose monetary easing stance.

Pound Sterling – UK Markets

The Pound rebounded against the US Dollar following a brief slump in yesterday’s early session, after minutes of the BoE’s last monetary policy meeting revealed that the BoE Governor Mervyn King and two other policymakers remained in the minority, as other MPC members voted against increasing the size of the asset purchase programme. However, the Chancellor undertook a major overhaul of the UK monetary system by laying the groundwork for revamping the BoE’s inflation mandate, thereby enabling the central bank to undertake growth enhancing measures. With the bank given more flexibility, it will be interesting to see whether MPC members change their stance in the next policy meeting. Meanwhile, the UK Chancellor tried a balancing act while sticking to his austerity drive during his budget presentation yesterday. The budget offered a boost to infrastructure spending and household income and gave some respite to home buyers. However, growth prospects remain anaemic, as the OBR cut its 2013 economic growth forecast for the UK to 0.6% and indicated that net debt would not fall until 2017-18. In today’s session, retail sales posted a monthly rebound for February, in line with the recent buoyant BRC sales report. Data also revealed that the public sector in the UK borrowed less than expected last month, providing some much needed relief to the Pound against the majors.

US Dollar – US Markets

The Fed’s decision to leave its monetary policy unchanged led the greenback to weaken against the Euro in yesterday’s trading session. The Fed Chief, Ben Bernanke, reiterated that the central bank would continue with its ultra loose monetary policy stance until it is assured that gains in the labour market are sustainable. However, he did not rule out any adjustments to the pace of asset purchases depending upon the economic outlook. With the economy garnering substantial momentum recently, a winding down of the current stimulus in a phased manner remains a possibility. However, this recent improvement is still not reflected in the Fed’s revised projections, as the central bank moderately lowered its growth forecast for this year while sticking to its unemployment rate target of 6.5 percent by 2015. A raft of economic releases due later today, including jobless claims, manufacturing PMI and existing home sales, will grab market focus. In a noteworthy development, the US Senate cleared roadblocks in passing a legislation to avert a government shutdown next week.

Euro – European Markets

“Risk on” sentiment increased amongst investors yesterday after the Fed maintained its decision to continue with the current bond buying programme, leading the single currency to nudge higher against the US Dollar. However, persistent worries in Cyprus, coupled with dire PMI data in major European economies, has capped upside potential for the Euro in today’s trading session. Data revealed earlier today that economic activity in the Eurozone shrank for March, with German manufacturing PMI slipping back into contraction territory amid a dismal economic outlook for the region. Moreover, the Russian Prime Minister has warned that Eurozone’s pre condition to bailout Cyprus would likely result in Russia withdrawing its share of Euros held in its central bank reserves. With Cypriot leaders contemplating working on a “Plan B” in an effort to secure a €10 billion bailout offered by its European partners, it remains to be seen whether they can avoid a major catastrophe for the nation. With the majority of European macro releases out for the day, the single currency is likely to monitor developments in Cyprus for further direction.

Other Currencies – Highlights

Robust trade balance data helped the Japanese yen to nudge higher against the US Dollar and the Euro in today’s trading session. A weaker Yen paved the way for the nation to lodge a narrower trade deficit for February, which surpassed market expectations. Moreover, a bleak set of PMI releases from Eurozone provided further boost to the Yen, as investors shunned high yield currencies. Meanwhile, the BoJ new Governor, Haruhiko Kuroda, begins his tenure from today. Traders keenly await the newly appointed Governor’s comments scheduled later today for further insights in gauging whether the BoJ would follow an aggressive monetary policy stance during his tenure. On account of a light domestic economic calendar during this week, news emanating from overseas markets is likely to determine the trend for the Japanese Yen.