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The non-budget, budget day

The non-budget, budget day

GBP
Sterling sentiment improved, albeit cautiously, with optimism surrounding an announcement of a transitional deal at next week’s EU Summit. In addition, there was a small narrowing of bond yield spreads compared with German and US bonds which helped underpin the Pound. Chancellor Hammond is expected to lower budget deficit forecasts today in the Spring budget update; with focus switched to the Autumn, it’s unlikely there’ll be any other significant changes. Sterling could gain some support if there is an upgrading of growth forecasts and confidence in the budget forecasts.

Futures markets are pricing around a 70% chance of a UK rate hike in May, but it hasn’t yet been fully priced in as the transitional deal is not yet a known entity. The Euro held the 1.1300 mark while Sterling advanced to test resistance above 1.3900 as the Dollar faltered.

USD

The US Dollar has handed back some of Friday’s gains as the focus on wage inflation looks like it will slow or totally stop the Federal Reserve (Fed) from continuing its aggressive interest rate hiking plan.

The market is mindful that stronger wage and inflation expectations may increase the chances of a more aggressive Fed in terms of policy normalization; however, recent US trade policy developments could warrant a more cautious Fed, at least until the uncertainty wanes.

Looking ahead, the Dollar will be in the spotlight due to the publication of February’s inflation figures tracked by the CPI. The market forecasts headline prices rising 2.2% year-on-year and 1.8% year-on-year excluding food and energy costs.

EUR

European Central Bank (ECB) council member Smets commented that the output gap (the difference between potential and actual economic production) could take longer to close and currency volatility is still significant, delaying the end of QE and rate normalisation. Fellow member Coeure also commented that Eurozone inflation is not optimal.

After edging higher on market open, the rhetoric nudged the Euro lower against the Dollar. Broadly benign risk conditions fostered Euro-funded carry trades (selling Euros for currencies with higher interest rates) during the day, which hampered the Euro, although there was support from the robust current account position and substantial surplus.

Data to watch:

11:30 UK Budget Report
12:30 US CPI, CPI Ex food and Energy
14:30 CAN Gov. Poloz Speech
22:10 NZ RBA Asst Gov. Kent Speech
23:50 JAP BoJ Monetary Policy Meeting

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