Are People Looking At British Pound (GBP) as Safe Haven From Europe (albeit short term)?

Quiet start to the week will allow market to focus on events later on this week. Domestically, the key event of the week will be the Chancellor’s 2013 Budget on Wednesday. Lloyds TSB expect a Budget that is fiscally neutral and allows the current focus on structural deficit reduction to continue. Within this, the Chancellor is likely to focus on measures aimed at boosting the supply side of the economy. The BoE Governor has intimidated strongly that supply side reforms are required to put the UK economy back on a sustainable growth trajectory. Notwithstanding the possible overshoot this year, the OBR’s forecasts for public borrowing and debt over the coming years are unlikely to deviate significantly from those published in the Autumn Statement in December. Surrounding this, the rest of the week will see a plethora of key UK data. The latest assessment of inflation, retail sales and the labour market are likely to continue to influence the policy debate.

The EU have scored a spectacular own goal this weekend in bailing in depositors in Cypriot banks. This massively increases the risks involved in any bailout in the future, as the fear of a depositor levy elsewhere seems sure to trigger capital flight if any bailout is threatened or applied for. While the motivation for the Cyprus decision seems related to a desire to punish money laundering, the subtleties will be lost on depositors elsewhere who anticipate a need for a bailout.

Euro perked up in morning European trade rising above the key 1.3050 level as commentary from EU summit downplayed austerity and focused more on growth encouraging investors to plow back into currency. The recovery in the pair which started during Thursday’s North American session extended in Friday’s European dealing as sentiment towards the euro improved.

Both France and Italy insisted on a more flexible approach with respect to fiscal budgets and won what was view as concession when Germany did not formally object to their request. Indeed Angela Merkel avoided any clash with France, telling reporters: “We made clear in a very consensual discussion that budget consolidation, structural reforms and growth are not in contradiction but are mutually reinforcing.”

European leaders are beginning to realise that a policy focused solely on austerity is failing miserably both an economic prescription and as a political stance. The election in Italy made it abundantly clear to the politicians that the citizenry of Europe will not tolerate any further deficit cutting until economic conditions show a modicum of improvement. Therefore the more accommodative posture by the EU summit suggests a small but significant shift away from austerity towards more growth oriented solutions.

This week shapes up as a crucial test for the currency with a slew of key economic reports on the docket including ZEW, Flash PMI and IFO. If the data begins to show some improvement then the recovery thesis could take hold and the EUR/USD could rally towards the 1.3300 level as the week proceeds.

In the US, the Federal Reserve meets on Wednesday, making its latest policy announcement followed by a press conference. The Fed is almost certain to maintain its current commitment to open-ended QE and we fully expect Chairman Bernanke’s press conference to make the case for maintaining stimulus as he and Vice-Chairman Yellen have in recent speeches. Yet with the US posting increasingly encouraging economic signs, despite the recent sequester, markets have started to consider when the Fed may taper its current operations. This meeting is unlikely to suggest any members are realistically looking at change ahead of the summer. However, the minutes to this meeting may give a better insight into the range of views amongst Committee members.

In terms of data today, the NAHB housebuilders index is likely to show that the broad improvement in home builder sentiment has resumed in March. Having fallen back a touch in February, Lloyds TSB expect the index to rise to 49 from 46, reflecting the wider improvement in the labour market recently.

The contents of this report are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The author(s) cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

About these ads
This entry was posted in Banking, Foreign Exchange, International Payments, Money Transfers and tagged , , , , , , , . Bookmark the permalink.