Yellen Comments Eclipse Osborne Budget Speech

On expected lines, the UK Chancellor, George Osborne’s Budget Speech offered little on the fiscal front and was largely a non-event for currency markets. With seemingly one eye on next year’s election, Osborne outlined plans to revolutionise the domestic pension industry, in a move that will delight savers. Further, Osborne announced a number of tax sops to boost business investments and also addressed the issue of the nation’s waning exports of late. Meanwhile, the domestic economic recovery continued to remain strong as suggested by yesterday’s upbeat jobs report. Across the Atlantic, the new Fed Chief, Janet Yellen, continued to trim bond purchases and hinted at a possible hike in interest rates sooner than expected, weighing heavily on market sentiment late yesterday.

Pound Sterling – UK Markets

Yesterday’s Budget Speech by the UK Chancellor, George Osborne, was largely a low-key affair for currency markets, with Sterling investors taking little notice of the Chancellor’s unexpected plans to ramp up the domestic pension industry. Osborne unveiled plans to amend rules that forced people to buy an annuity at retirement, thereby giving them freedom to do what they want with their savings and pension. The move is likely to result in increased domestic savings in future. Further, the Chancellor announced tax sops including abolishing the 10% tax rate on savings, while also announcing several measures to boost the nation’s exports. Meanwhile, despite the Chancellor raising the nation’s growth forecast for 2014 and 2015, he indicated that the government’s austerity measures will continue for a prolonged period of time. Meanwhile, the Pound is trading in a tight range against the greenback this morning, recovering from its yesterday’s steep losses after the Fed hinted at an earlier than expected interest rate hike. Earlier yesterday, the upbeat UK labour market data had briefly lifted Sterling against its peers. Meanwhile, today’s CBI industrial trends survey and a speech by BoE policymaker, Martin Weale, will attract market attention.

US Dollar – US Markets

The greenback moved sharply higher against its major peers yesterday after the US Fed announced another $10 billion cut to its monthly bond purchases programme, citing continued improvement in the domestic labour market. However, Janet Yellen, the US Fed Chief, surprised markets by stating that the first interest rate hike might take place around six months later after the central bank concludes its stimulus programme this year. Further, the central bank altered its forward guidance on interest rates, stressing that it will look at a wider range of economic data instead of focusing only on its 6.5% unemployment rate threshold. Additionally, the Fed while marginally lowering its US economic growth forecast for 2014 and 2015, raised its employment outlook, forecasting that the unemployment rate will fall in the range of 6.1% to 6.3% by the end of 2014 and as low as 5.6% in 2015. The US Dollar has held on to its yesterday’s gains and is trading in a tight range against its major counterparts this morning. Going forward, today’s initial jobless claims and existing home sales data will be eyed by investors to gauge the pace of economic recovery in the nation.

Euro – European Markets

In the absence of major domestic economic data yesterday, the single currency tracked crucial news flows emanating from across the Atlantic and subsequently weakened against the US Dollar after the Fed Chief hinted at a sooner than expected hike in borrowing costs. Meanwhile, data released earlier yesterday indicated that construction activity in the Euro zone improved significantly for January, hinting that a broad-based economic recovery in the currency bloc might be underway. The Euro is range bound against most of its major counterparts in today’s trading session. Meanwhile, the weak German producer prices report released this morning is likely to add to deflationary concerns in the currency bloc, especially in the wake of the unexpectedly weak Euro zone consumer price inflation report released earlier this week. Later today, investors will keep a tab on the two-day European Council summit in Brussels commencing today which is expected to be dominated by the Ukrainian crisis, with the EU considering imposing tougher sanctions on Russia in response to its invasion of Crimea. Additionally, important macroeconomic data in the US will be eyed by investors in the session ahead.

Other Currencies – Highlights

The Kiwi Dollar is trading on a weaker footing against its major counterparts this morning tracking yesterday’s hawkish tone of the Fed monetary policy meeting. The new Fed Chief hinted at an earlier than expected interest rate hike yesterday, thereby underpinning demand for the greenback. Meanwhile, domestic economic data released earlier today showed that New Zealand’s economy expanded in line with market forecasts for the fourth quarter, with economic recovery boosted by rising asset and export prices. However, it remains to be seen if economic recovery continues to gain traction, particularly after the Reserve Bank of New Zealand raised interest rates earlier this month. With little of note on the domestic macro front today, investors in the Kiwi Dollar will keep a tab on the crucial US labour market and housing data for further direction. Furthermore, tomorrow’s domestic consumer confidence report will prove crucial for the New Zealand Dollar against the majors going forward.