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Budget and BoE to decide Sterling direction

Budget and BoE to decide Sterling direction

GBP

Sterling maintained a relatively firm tone ahead of yesterdays open despite very weak global risk conditions and a slide in oil prices. The UK currency peaked at 1-month highs around 1.3200 before correcting while the Euro was held below 1.1500 in choppy trading. 

Underlying volatility inevitably remained high with markets also waiting for the government’s latest coronavirus update, but there was no immediate shift in advice. UK sources indicated that the government would table a number of legal texts including a draft Free Trade Agreement before next week’s latest round of trade talks with the EU. 

There was also an element of caution ahead of tomorrow’s budget statement, especially with uncertainty over potential spending commitments. There was also some speculation that the Bank of England would cut interest rates in a coordinated move. Overall, Sterling consolidated around 1.3125 with the Euro around 1.1520. 

 

USD

Markets expected further aggressive action by the Federal Reserve (Fed) with futures markets indicating a 100% chance that the Federal Funds rate would be 0.50% or lower following the March 18th policy meeting. The on-going slide in US yields continued to undermine the dollar, although it did recover slightly from 13-month lows with the Euro settling around 1.1450. 

After the US close, the Italian lock-down was extended nationwide to help contain the coronavirus which limited Euro support and hence the dollar also rallied significantly on hopes for US support measures with the Euro retreating to lows below 1.1350. 

 

EUR

Stronger than expected German industrial production data had little impact while the trade data recorded unchanged exports for the month with a 2.1% annual decline. The Euro-zone Sentix investor confidence index declined sharply to -17.1 for March from 5.2 previously and below consensus forecasts of -11.0, reinforcing underlying Euro-zone growth concerns. 

As equity markets declined sharply, there were stronger expectations that the ECB would cut its interest rate at this week’s policy meeting. There are also increased fears over the Italian outlook, especially with heavy selling in the banking sector. Nevertheless, the Euro still gained an element of defensive support and short covering given the very strong current account position. Volatile trading conditions are expected to continue with the Euro trading at 1.1380 against the Dollar.

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