By Matthew Boyle
All eyes on UK budget tax cuts
With last week seeing a decline for the Pound, this week poses several hurdles with the release of the UK Budget and several key economic data releases. Last week saw the Pound ebb away from the previously seen 12-month highs against the Euro, following Eurozone inflation data that indicates any cut to Eurozone interest rates by the ECB has likely been kicked down the road for a later date.
Whilst February was a month of very low volatility in the market, this week is likely to see that change. Eyes will be on Wednesday as we see Chancellor Jeremy Hunt deliver the Spring Budget in what could be a trigger for movement in GBP rates. ING and other analysts estimate we could see a swing of as much as 2% if Hunt gets it wrong; the expected tax cuts if delivered incorrectly or poorly targeted could in turn effect the desirability of the UK Bond market – something which over the past year has helped boost GBP (in tandem with the BoE interest rate hikes).
On Thursday, we also have the European Central Bank monetary policy statement and interest rate decision. Last week we saw the Euro gain after German and French inflation indicated a rate cut by the ECB would be unlikely in the short-term. The result of pushing any expected rate-cut helped the single currency gain and indeed if this position is reinforced by Lagarde on Thursday could see further EUR gains. A poor budget on Wednesday and a hawkish ECB Thursday pose a significant threat to exchange rates, although equally should Hunt deliver and the ECB hint toward a mid-year cut still GBP/EUR rate will likely once again test the upper limits of the established rate range. Whether it has the legs to break through is another question.
Friday sees the release of Eurozone GDP data and US non-farm payrolls and employment data. Whilst the USD has benefited from its safe-haven status for some time-now and largely been the best performer of the 3 majors, this week’s focus will undoubtedly be on Wednesday’s Budget and the ongoing tug-o-war between the Pound and Euro. With exchange rates trading within such a tight range for over a year now and following February’s low volatility this week this week could be a choppy one of the currency markets.
With GBP/EUR rates within a cent of the best they have been in over a year and analysts warning of a potential drop should things go badly for the Pound, those reading may like to consider trading now rather than chancing navigating a week that poses significant risk.
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