After a long time out of the spotlight, the UK again took prominence today as the minutes from the MPC’s March meeting were released this morning. In addition, we saw Chancellor George Osborne announce the UK’s 2011 budget earlier today. The former caught the eye but the latter left the market unperturbed.
Central bank interest rates are the real market-mover at present and an insight into policymakers’ views will always attract attention. The minutes revealed that Andrew Sentance’s hawkish camp failed to coax a fourth MPC member to join their campaign to increase interest rates. Had they succeeded in this, the outlook for a BoE rate rise as early as May would have been greatly improved, particularly in light of yesterday’s appalling UK inflation figures (4.4%!).
On release of the news, sterling dropped sharply across the board, and investors may well have been disappointed by the lack of any real increase in hawkish language adopted within the minutes. Indeed if anything, the tone reflected additional uncertainty following recent global developments, which will likely cloud the UK’s economic outlook.
Osborne’s budget announcement today contained a wide range of interesting material; the headline was probably Osborne’s downward revision of the UK’s growth forecast for 2011 to 1.7% (from 2.1% - itself an already downwardly revised estimate) but sterling has survived this hit relatively unscathed.
Sterling has actually lost little ground to the euro today as some bad news from the eurozone irritated the markets. It has been announced that the EU Summit this weekend will not be reaching a final decision on the ever-troublesome bailout fund. Given that the markets had grown in enthusiasm after initial progress at a preliminary summit, and that they would get a definitive answer this Friday, the delay of the decision until June seems to have frustrated euro-investors. Concerns have also mounted with regard to the Portuguese Parliament’s vote on its government’s austerity measures, which if rejected will almost certainly see its PM resign, and could well be the catalyst for a Portuguese bailout.
At present, sterling remains in limbo around €1.15 with another trigger needed to define direction.
Richard Driver
Analyst – Caxton FX
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