Sterling falls to 2 and a half year low against the rand following British budget

The pound fell sharply across the board this afternoon, and dropped to a 2 and a half year low against the South African rand, as the market responded to the bleak economic outlook for the UK detailed in Chancellor Alistair Darling’s budget report. The pound fell as low as 12.9796 for first time since August 2006 as market sentiment turned against sterling.

Sterling recovers recent losses against the euro

The pound recovered the losses it suffered against the single currency on Monday in choppy trading yesterday, despite official statistics revealing that retail prices had fallen for the first time in almost half a century, and ZEW releasing a better than expected economic sentiment survey in Germany. The Retail Price Index in the UK hit -0.4% year-on-year in March, which is the first time inflation has been negative since 1960, whilst the Consumer Price Index – the government’s official measure of inflation – also fell to 2.9%, although remains above the government target range. Despite the inflation figures, a hawkish member of the Monetary Policy Committee, Andrew Sentance, said that he could see glimmers of recovery in the economy.

Markets are bracing themselves for today’s budget, where Alistair Darling will have to admit the economy is set to contract 3-3.5% this year – a staggering three times worse than what he forecast just five months ago. Investors will also listen carefully to how the chancellor is planning to tackle the mounting debt problem the UK is facing up to.

There are no major economic announcements due in the eurozone today, whilst there is a plethora of data being released in the UK alongside the budget. The Bank of England minutes will be of particular interest, whilst unemployment figures, money supply, and public borrowing figures are also released.

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.

Euro up marginally against the US dollar

The euro strengthened slightly against the US dollar yesterday following comments by US Treasury Secretary Timothy Geithner, who gave a positive view of the US banking sector. Geithner stated on Tuesday that US banks are well capitalized, showing an optimistic view that the banks are over the worst of the recession. He also said that the Obama administration has enough money, through the Troubled Asset Relief Program (TARP), to deal with any further problems that may arise. This resulted in investors flocking to riskier currencies as opposed to the safe haven of the dollar.

Additionally, a surprisingly strong rise in German investor confidence in April gave the euro a boost while the dollar weakened against most major currencies. Germany's ZEW economic sentiment index showed its sixth month of gains, jumping to a positive 13% from a negative 3.5%. April's reading is the first positive one since July 2007. The euro was up at $1.2944 in late US trading from $1.2924 on Monday.

There are no significant announcements taking place in the US or eurozone today, but traders will be watching the release of the budget report in the UK closely as this is likely to have an effect on currencies across the board.

Kiwi dollar holds steady

The New Zealand dollar managed to hold steady yesterday, as initial sharp losses in equity markets, caused by concerns over the banking sector, were partially clawed back after comments by the US treasury that banks were well capitalised. This helped bank shares rally, and reinforced a recent pattern of equities seesawing as sentiment on the banking sector rises and falls. With little data due domestically the kiwi will continue to be guided by equities and risk appetite.

Australian dollar makes small gains

The Australian dollar made small gains against sterling yesterday, as a rally in stocks helped soothe investors’ nerves. The minutes from the RBA's last meeting, released yesterday, revealed that the decision to cut rates was a close one and that any further reductions are likely to be done in small increments. Meanwhile, UK inflation data gave sterling a small positive, as CPI data indicated the economy had not yet fallen into deflation. Investor focus today will be largely on a raft of UK data, including the BoE Minutes, culminating in the release of the government’s annual budget. The budget is likely to be the gloomiest in a generation, with analysts warning the government will likely forecast an economic contraction of around 3-3.5 percent for this year. The budget deficit is also likely to near 12 percent of GDP, its highest level since WW2. Investors will remain reluctant to take on large positions ahead of this news, with other key data, such as retail sales, released in the coming days. A series of poor results may put even more pressure on the pound.