MPC minutes and budget see GBP halt gains

Tom Tong24/Mar/2011Currency Updates

GBP

Sterling lost this week’s earlier gains against the dollar and the euro as the Bank of England Minutes remained unchanged and George Osborne’s budget gave mixed messages to the market. The Bank of England minutes from this month’s rate decision meeting showed the that the voting pattern remained unchanged at 3 voting for a rate hike with 6 remaining in favour of holding interest rates. The market may have been expecting more signals of a rate hike than this vote revealed. The market still believes views the need to cap inflation, which earlier this week came in at 4.6%, as giving high potentials for rate hikes later this year. The market reaction to the minutes at 09:30 was a minor sell off for sterling.

Later on in the morning at 11:30, sterling continued to decline as George Osborne delivered his budget speech. Many mixed messages emerged from the speech. The most significant was the market’s mixed reaction to his 1p cut in fuel duty. It is widely felt that any gain to the consumer will be offset by price rises at the pump. Osborne has hiked the tax on North Sea oil companies by 3p. It is felt that this added cost will be passed onto the consumer.

The furious reaction of the oil companies was to threaten a reduction in North Sea Exploration and research costs. This poses a major risk to UK oil supply levels. Elsewhere, the market reacted negatively to some important factors revealed in Osborne’s speech. Firstly, the fact that despite the public sector cuts on services etc., government borrowing is still rising. Second, the inflation prediction revealed for 2012 showed a revision of the expected 2.6% up to 4.8%. The only significant UK data to be released today is UK Retail sales at 09:30, which is expected to show retail sales falling by 0.5% month on month.

EUR

Yesterday saw the euro gain 0.4% against the pound due to the sterling negatives described above. Meanwhile against the dollar the euro dipped by around 0.6%. The euro was still affected by the sovereign debt uncertainties that emerged again earlier this week with restructured bailout packages for both Portugal and Ireland. The main focus on European data today will be both service and manufacturing PMI numbers. With the main EU numbers coming at 09:00, expected to show manufacturing PMI index at 58.3, and the services index at 56.4.

In further news, the Portuguese Government failed to ratify a package of austerity measures leading to the resignation of the Prime Minister. 

USD

The dollar was the biggest winner yesterday, more by default if anything else. The dollar performed strongly against a weakened pound, gaining 0.7% on the day on the back of both the MPC’s minutes and Osborne’s budget. Against the euro it gained 0.4% as the euro remained vulnerable due to the current sovereign debt issues. The main market focus today will be on durable goods number and the Jobless claims all out at 12:30. The market expects durable goods orders to be up at 2.1% for core goods and 1.2% for non-core durable goods. Meanwhile the jobless number is expected to come in at 388k, slightly up on last month’s figure of 385k.

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Written by Tom Tong

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