FX Strategy Weekly by Lloyds TSB

Rising inflation expectations in the UK and confirmation that the Budget will be held on March 24 means GBP shorts may be forced to cover positions as government leaks emerge over the next two weeks of UK deficit reduction plans.

Rising inflation expectations in the UK and confirmation that the Budget will be held on March 24 means GBP shorts may be forced to cover positions as government leaks emerge over the next two weeks of UK deficit reduction plans. Ultra-loose monetary policy in the G7 and positive economic data surprises in the G10 are lubricating pro-risk strategies, with higher oil and equity prices supporting rallies, notably for the CAD where strong employment data may force the Bank of Canada to raise rates before the Fed. A shift in the FOMC’s stance on low interest rates and ‘extended period’ rhetoric appears unlikely at the one-day meeting next week, and may put the trading emphasis on the BoJ meeting instead where new measures to counter persistent deflationary pressures may be discussed. For the BoE MPC minutes (Wednesday), we doubt much will come out in terms of major new points of contention on the committee, though the surprise surge in the February services PMI (data trio of dismal retail sales, IP and foreign trade unknown to the MPC at the time) and the strongest Inflation Attitudes survey in two years may reveal a less conciliatory stance with regard to the possible extension of QE, lifting GBP to better levels to sell.

• Recap

• The US dollar was lower overall this week despite upside surprises to US economic data. A rally in equities taking most major indices back towards the recent highs and the general pro-risk theme stemming from an easing in concerns about Greece (for now) helped some of the more recently maligned currencies, including the euro and sterling to post gains versus the US dollar over the week.

• There was little economic data in the UK this week but the two main reports that were posted much weaker than expected outturns. An unexpectedly wider trade balance and contractions in manufacturing production data for January sent GBP/USD from 1.52 at the start of the week down to 1.4873 on Wednesday. The back end of the week, in particular Friday, saw GBP/USD rally three big figures to return to the 1.52 mark.

•Successful government bonds auctions in Portugal and Spain and further talk of a formalised aid plan for Greece by next week helped keep the euro supported. After bouncing off 1.3550 twice earlier in the week, EUR/USD rallied to close the end of the week at 1.3755.

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