As the Chancellor of the Exchequer, Alistair Darling, gave one of the gloomiest budgets in recent memory, the pound lost value against most major currencies, falling by nearly two cents against the euro. The Chancellor confirmed that public borrowing would total £175bn in 2009-10, or 12.4% of GDP. The budget is not expected to return to balance until 2017-18. In addition to the dire state of public finances, the Chancellor confirmed that the UK’s economy is set to contract by 3.5% this year – three times worse than what was forecast just 5 months ago – with a forecast for growth in the economy next year of 1.25%. The growth figure for 2010 seems to be bullish, especially when you consider that the International Monetary Fund is forecasting the economy to contract by 4.1% this year, and that the UK’s economy will continue to contract next year by 0.4%. It was also announced that there would be tax hikes, including a new 50% rate of earnings above £150,000, prompting fears of a brain drain out of the UK similar to what was witnessed in the 1970s. Investors reacted to the budget by selling the pound, with sterling falling a cent and a half by the time Alistair Darling had finished speaking.

In other news yesterday, it was revealed that the number of Britons claiming jobless benefits rose in March by 73,000 people, with unemployment rising to 6.7%. The Bank of England Minutes did not spring any surprises, as the votes to keep interest rates on hold at 0.5% and to continue with its quantitative easing plan were unanimous.

In early trading today the pound is bouncing off the lows set yesterday against the single currency, as the Caxton FX analysts suggest there was a slight overreaction to the budget yesterday and we may see a bounce today as investors pick up sterling at lower levels. There is little data out of the UK today, with just the Confederation of British Industry releasing their industrial trends survey. Within the eurozone, industrial new orders, and PMI services and manufacturing data will be of note for investors.

Pound suffers sharp losses against the US dollar

The pound fell by 1.83 cents against the US dollar yesterday after concerns rose about the future health of the UK economy following Alistair Darling’s budget. With Britain entering its worst economic downturn for over 60 years, Darling predicted that the economy would shrink by 3.5% in 2009 and announced that government borrowing would reach £175 billion. With fiscal debt set to increase by 12% of GDP in the 2009/2010 year, there are worries about how well Britain will be able service its obligations in the future. Because of this, one can expect any news of a ratings agency review of Britain’s credit worthiness to be met with a significant selling of the pound. News of the new 50% tax level for those earning in excess of £150,000 also saw sterling come under pressure, as some suggested that a ‘brain drain’ was the last the thing the struggling City needed. One upside of a weak pound is that it should encourage foreign investors to buy the £220 billion of government bonds that the treasury will issue over the coming year to fund their spending plans.

It was announced in the US yesterday that house prices had increased by 0.7% in February, positive news for the American economy where the housing market is very important.

In today’s trading the pound has pared some of yesterday’s losses ahead of the announcement of CBI industrial trends data in the UK and initial jobless claims, continuing jobless claims and existing home sales figures in the US.

Euro strengthens against the US dollar

The euro strengthened against the US dollar yesterday when equity market gains in Europe and the US reduced investors’ appetite for safe-haven currencies. The single currency finished up 0.45% against the greenback at $1.3003, having started the day at $1.2945. Early in the session, US stocks fell after Morgan Stanley reported a second quarterly loss and significantly reduced its dividend. However, a report by the Office of Federal Reserve Housing Enterprise Oversight showing a rise in American house prices in February triggered a rebound on Wall Street, as investor jitters over the state of the global economy eased. As a result, their appetite to buy into the perceived riskier euro increased. Demand for the single currency more generally was also driven by UK Chancellor Alistair Darling’s optimistic budget forecast that the British economy will contract by 3.5% in 2009 before resuming growth next year. His comments sparked a mass sell-off of sterling, with investors looking to the euro and US dollar in particular. The strength of eurozone equity markets was also driven by the news that Credit Suisse Group AG, Switzerland’s largest bank by market value, returned to profit in the first quarter, increasing investor sentiment that the region is well placed to come out of recession.

There are some important pieces of data released today in both the eurozone and America. At 09.00 BST, the European Monetary Union’s Current Account data is released. In the US, the National Association of Realtors releases its Existing Home Sales for March and Month-on-Month at 15.00 BST, which should provide investors with a clearer indication of the state of the US housing market.

New Zealand dollar experiences mixed trading

The New Zealand dollar had mixed results yesterday, gaining against the ailing pound but making sharp losses against the aussie. The kiwi largely remained under pressure, with share markets slipping on poor results from Morgan Stanley. It was also weighed down by comments from New Zealand Finance Minister, Bill English, who stated that the New Zealand economy was likely in its sixth quarter of recession and the government would cut future spending in an attempt to contain widening deficits.

Australian dollar makes sharp gains against the pound

The Australian dollar made sharp gains against sterling yesterday, as the pound dived after the UK annual budget. The government forecast a massive increase in public debt and announced tax rises for high earners. The UK finance minister predicted the UK economy would contract by 3.5 percent this year while government borrowing would climb to £175 billion, or more than 12 percent of Britain’s GDP. Meanwhile, proposed tax hikes for high earners also heaped pressure on sterling, with fears this could see talent go abroad. The main worry for markets at the moment is the UK's ability to service its debt. Any hint by ratings agencies that Britain’s credit rating might be lowered will see further mass selling of sterling.

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.