Will Rishi’s Budget Back the Pound?

GBP

Sterling started the week in the same vein as it had for entirety of 2021, reaching new highs against both dollar and euro in the early hours of Thursday morning. This strength came of a back of a rumour from the Telegraph that the lockdown roadmap may be able to be shortened if everything went well. But this strength disappeared very quickly on Friday as the pound fell by more 2% in less than 24 hours against both the euro and dollar and may signal the end of the unmatched bull run. The hit to sterling came of the back of falling equity prices as the pound has recently developed high sensitivity to the global stock markets which in turn are reacting to the selloff in bonds. The Bank of England continues to be a positive influence on the pound as they stand their ground on current policy and further dismiss the introduction of negative interest rates. Data wise, the job report was better than expected on Tuesday but with major Government intervention still in place this doesn’t show a clear picture.

The main event this week will be the budget on Wednesday where Rishi Sunak is expected to extent the furlough scheme along with the other cash flow policies until June, as this ties in with the roadmap. Analysts are not expecting a major tax announcement next week, though the Chancellor may signal an intention to raise them next year. This announcement of additional fiscal support next week should underscore the constructive outlook for the pound for 2Q, with the further fiscal help facilitating the economic recovery. This should lead to sterling continuing to increase against the dollar but may fail to get much further against the euro. Away from the budget, the pound is in for a quiet week on the economic calendar with the only announcement of note coming on Monday in the form of Markit Manufacturing PMI.

USD

The dollar surged on Friday as widespread gains lifted most U.S. exchange rates and pushed the Dollar Index more than half a percent higher. The Dollar rose against the pound, euro, commodities and other risk currencies after the latter capitulated alongside stock markets at the North American open on Thursday, which subsequently gave way too much crashing and banging in Asian financial markets overnight as traders closed of their positions for the end of February. The surge in real yields of Treasuries is becoming an issue for the Fed as inflationary pressures start to mount. The surge reflects a view that the Fed will have to tighten much more aggressively down the road if it wants to keep real interest rates low for the next few years in line with its revised goals for inflation and employment. Data wise, durable goods orders beat expectations and GDP for Q4 matched the consensus at 4.1%.

This week will shed light on whether last week’s dollar strength has any actual backing in Fed policy with many Fed members speaking, including chairman Jerome Powell on Thursday. This will provide the central bank with an opportunity to slow the Treasury decline by at least starting to express some concern, which has been surprisingly lacking so far. Though the disruption in the bond market may continue next week with February’s ISM data and the jobs report. A strong nonfarms number would mean the inflationary pressure is continuing to mount for the Fed and a change in policy may need to follow.

EUR

The euro had one of its best weeks in a while as it made ground against every G10 currency apart from the dollar. The euro strength is said to come from technical demand as emerging markets had been reinflated in recent weeks by Euro-funded and yield-hunting “carry trades,” closure of which asks Euro buying by default. The ECB have taken a more hands-on role approach versus the Fed as they formally powered up verbal intervention to resist the bond sell-off and have strongly hinted at using the flexibility of its bond buying Pandemic Emergency Purchase Programme (PEPP) to resist the move.

This week will see European leaders debate how and when they will reopen their economies. Merkel will be discussing this with state leaders on Wednesday and is seen as the most important due to the size of the German economy. With Europe still struggling to roll out at the vaccine, it can no longer be blamed on teething problems but a systematic issue within the EU. On the data front, Consumer Price Index is released on Tuesday morning expected at 1.1%, anything above this will put pressure in the ECB to start reassessing their quantitative easing programme.