Pound comes under selling pressure against the euro

The pound came under selling pressure yesterday as equity markets tumbled and investors began to brace themselves for the budget due in the UK on Wednesday. Despite the employers’ group, the CBI, coming out and forecasting that there will be economic growth in spring next year, markets were concerned about what may prove to be one of the grimmest budgets in decades. Sterling’s problems were also compounded by the announcement from Bank of America that it had seen a large increase in troubled loans, with the bank setting aside more funds for potential credit losses. Such news is negative for sterling due to the UK’s heavy dependence on the banking sector to drive the economy.

The Consumer and Retail Price indices are released in the UK this morning, giving an indication of inflation at present. Inflation has been cooling of late as commodity prices have fallen in the past year and the economy has been slowing. ZEW also release their economic sentiment survey within Germany this morning. Overnight we have seen Asian equities come under more selling pressure in a possible sign of things to come in Europe and North American trading. A slight boost to the FTSE today may come from Tesco, as they have reported pre-tax profits of £3.13bn, ahead of expectations, and an improvement of 10% on last year.

Pound weakens against the US dollar ahead of budget

The pound fell 2.45 cents against the US dollar in Monday’s trading to close at the 1.4537 level as investors remained cautious ahead of the UK’s budget tomorrow. Alistair Darling is expected to announce one of the poorest economic outlooks for decades when he outlines his budget for 2009-2010, and he is also expected to try and explain why the UK will need to increase borrowing to unprecedented levels. The Treasury looks set to reveal that it anticipates a 3.0-3.5% slowdown in the UK economy, a stark increase from November’s prediction of 0.75-1.25%, and that borrowing will hit around £180 billion, up from a projected £118 billion in November. The Confederation of British Industry (CBI) announced yesterday that it believes that the recession will ease off in the second quarter of this year and Rightmove reported that the rate at which UK house prices are falling had eased off. However, these announcements did little to pare sterling’s losses against a broadly stronger dollar.

In today’s trading the pound has managed to hold its ground somewhat against the US dollar, having come off an earlier low of 1.4471. Today sees the announcement of Consumer Price Index and Retail Price Index data in the UK and the ABC/Washington Post Consumer Confidence survey in the US.

Euro pressured by concerns about the banking sector

The euro rose by 0.1 percent overnight to $1.2932, a slight recovery after hitting a one-month low yesterday. Yesterday’s weakness came on the back of investors’ concerns over the global recession and renewed fears about the banking sector. Investors are also awaiting the ECB’s interest rate decision, where the central bank is expected to cut interest rates by 25 basis points and possibly announce non-conventional measures such as quantitative easing to tackle the recession, which other countries such as the UK and US have already undertaken. ECB President Jean-Claude Trichet indicated on Sunday during a trip to Tokyo that the bank's next move could likely be an interest rate cut of 25 basis points at its next meeting on May 7, but he failed to refer to any non-conventional measures, which resulted in increased investor concern about the euro.

US equities fell yesterday after Bank of America reported a jump in non-performing assets, underscoring the banking sector's troubles. The bank reported an increase in profit, but the fact that it reported a large increase in bad loans resulted in further concerns about the sector as a whole and prospects for an economic recovery. US data was also grim, with the Conference Board announcing that the recession is likely to continue throughout the summer.

In the UK, Alistair Darling will be announcing his budget report on Wednesday. This is likely to have an effect on most major currencies, because if the news is seen as bearish investors are likely to abandon riskier currencies and flock to the safe haven of the dollar, weakening the euro against the dollar.

In Germany, the ZEW Economic Sentiment Survey will be released at 10.00 BST this morning, whilst the ABC/Washington Post Consumer Confidence survey will be announced in the US at 22.00 BST.

New Zealand dollar hit by risk aversion

The New Zealand dollar was buffeted yesterday by falls in equity markets and decreased demand for riskier assets and high yielding currencies. Domestic data over the last week still paints a gloomy picture for the local economy, and investors are still pricing in a 50 basis point rate cut when the Reserve Bank of New Zealand meets next week. Local data remains sparse this week, so the kiwi will continue to be largely guided by broader market movements.

Australian dollar undermined by falling equities

The Australian dollar retraced recent gains against the pound yesterday, after falls in global equities dented investor risk appetite and demand for high yielding currencies. The share market falls were largely driven by the banking sector, with fears the situation may get worse before it gets better. This has effectively doused growing optimism that the global economy was bottoming out of its steep decline. Investors will focus on a raft of UK data in the next few days, starting with inflation figures today. But the central focus this week will be the UK government’s annual budget tomorrow. The government is already running a massive deficit so any plans to further loosen fiscal policy may be poorly received by markets.