Daily Market Report 21/03/2013

Fundamental data flooded the market yesterday which on its own would no doubt have created some substantial swings across many of the major currency pairs. However, persistent rumours from Cyprus and the UK Budget sparked a large amount of volatility for the UK pound.

The day kicked off with UK unemployment data, although this was somewhat overshadowed by the Bank of England minutes. Contrary to popular belief, there was no change amongst the MPC members with their stance on both interest rates and quantitative easing. This saw the pound gain strength rapidly against the US dollar, the euro and many other peers.

These gains lasted all of 2 hours when George Osborne started his budget announcement. Once again, the market has priced in what was expected to be more doom and gloom. Surprisingly, despite revised growth forecasts, Mr Osborne was adamant that we would not fall into the dreaded triple dip recession. To cement his positive theme, he went on to state no fuel tax increase, cancelling the ‘duty escalator’ on alcohol, increasing the personal tax free allowance and re-assuring the UK public that the health service and education sectors would remain protected from austerity.

All in all, his words were greeted with an unexpected level of optimism or perhaps just relief. Could it really be true that a slow but steady recovery is actually under way?

Of course, it is always possible the Cypriot bailout was still continuing to sap strength from the euro and help the pound keep its position a little more easily. Euro zone confidence is inevitably going to take a beating following a good few months out of the limelight. This observation was substantiated with worse than expected euro zone consumer confidence figures that were also published yesterday.

Last night the Federal Reserve decided to keep interest rates at 0.25% and made no changes to its US$85bn monthly bond-buying program. The Fed also stated that the recent mandatory budget cuts were offsetting improvements taking place elsewhere in the economy. The Fed’s comments weakened the US dollar ever so slightly.

This morning the Cypriot government will be presenting its ‘Plan B’ to party leaders this morning, with the potential of a vote on the plans later today. It is thought that the plan could include a bank levy on deposits over €100,000, a new loan from Russia, nationalising pension funds and potential for a restructuring or sell-off of its banking sector.

Data from the euro area this morning has shown that manufacturing and services figures from France, Germany and the euro zone as a collective have all fallen below expectations pushing the euro lower across many of its peers. In the UK, retail sales have beaten expectations with a growth in sales of 2.6% in February and public sector net borrowing costs showed a surplus of £4.356bn, beating market expectations. The pound has risen across the board following the data.

Key Announcements:

12.30pm – CAD – Retail Sales (Jan): Expected to improve to 0.9%.

12.58pm – USD – Markit Manufacturing PMI: Expected to rise to 55.

13.00pm – USD – Housing Price Index: Expected to improve to 0.7%.

13.30pm – USD – Initial Jobless Claims: Expected to improve to 345,000.

14.00pm – USD – Philadelphia Fed Manufacturing Survey: Expected to improve to -2.