Pound strengthens against the US dollar

The pound strengthened against the US dollar yesterday, rising by 1.36 cents from a near three week low as UK CPI inflation data suggested that the economy had not yet fallen into deflation. The Retail Price Index showed that for the first time since 1960 UK annual inflation was negative at -0.4% for March, down from zero in February, whilst the Consumer Price Index fell to 2.9%, down from 3.2% over the same period.

Despite a rise from $1.4537 to $1.4673 over the day, sterling’s gains over the US dollar were hampered by continued investor wariness ahead of Chancellor Alistair Darling’s budget announced later today. Speculation he may have to raise taxes in order to plug a multi-billion pound borrowing black hole have raised concerns, and he is expected to revise his growth forecast to -3.0% to -3.5% for the year. New Bank of England Monetary Policy Committee member Paul Fisher’s evidence to Parliament also affected investor confidence, as he warned that further weakness in global economic demand could hamper the UK’s growth prospects going forward. He also said that an extension of the Bank’s quantitative easing program and a foreign exchange intervention could not be ruled out but were highly unlikely. His downbeat predictions, together with the other data released during the day, meant the FTSE finished slightly down at -3.4 points, but losses were limited by some good news. Tesco, Europe’s second-biggest retailer, announced an underlying annual pre-tax profit of £3.13bn, a 10% improvement on the previous year, whilst Burberry, the UK’s largest publicly traded luxury-goods company, reported better-than-expected revenue figures. In America, lacklustre results announced by the Bank of New York Mellon Corp weighed on equity markets initially, as investors speculated that the worst is not yet behind the US economy, although the Dow Jones finished the day up 127.83 at 7969.56.

There is some very important data being released today on both sides of the Atlantic. The Bank of England’s Minutes from last month’s MPC interest rate meeting are released at 09.30 BST, as is the ILO Unemployment Rate, whilst from 12.30 BST the UK’s budget for the 2009/10 fiscal year will be announced by Chancellor Alistair Darling. In America, the Mortgage Bankers Association’s Mortgage Application data is announced at 12.00 BST, and at 15.00 BST the Month-on-Month Housing Price Index figures for February are released.