Investor confidence remained supported as markets prepared for the UK budget announcement. Rightmove housing data showed prices increase to 5.0% from 4.3% y/y and China announced that it would be allowing its currency to appreciate and relaxing its currency peg. Profit-taking did set in after the pound appreciated and forced sterling to give up previous gains, traders were cautious on the pound as they began to try and anticipate the budget announcement.

Chancellor of the Exchequer George Osborne delivered a tough but balanced budget and although the measures outlined would mean higher taxes and spending cuts traders reacted favourably towards the pound.

In the emergency budget Osborne revised down growth forecasts for 2010 and warned that unemployment would reach 8.1%, the previous weeks data release showed the current unemployment rate stood at 7.9%, which pulled the pound lower initially. Strength for the pound came from the tax policy and despite the VAT increase to 20% in January 2011, tax relief measures on corporate taxation and the fact that the VAT increase would not impact fuel costs were both seen are very positive measures to support economic recovery and stimulate industry with Britain.  Further support came from Fitch rating agency who called the UK budget a ‘strong statement of intent’, rating agencies in the past have heavily criticised the UK debt levels and the positive statement encouraged further investor confidence. Moody’s rating agency followed suit the following day and provided additional market confidence after it released a statement saying they felt the UK budget was broadly in line with expectations and addressed all the major concerns on economic growth.

The only remaining event for sterling was the Bank of England minutes that revealed a surprise 7-1 voted on interest rates. MPC member Andrew Sentance voted for a rate hike. Sentance also went on the say that he felt despite current uncertainties it was appropriate to begin to withdraw gradually some of the exceptional monetary stimulus. The minutes boosted the pound across the board as traders priced in the possibility of future rate hikes and investor risk appetite increased.

There was little economic data to given any further direction to the pound for the remainder of the week but the turnaround in future economic expectations provided enough confidence to investors and kept the pound supported.

The euro struggled against both a resurging pound and a dollar supported by risk aversion. Gains made after China’s announcement were quickly erased when Fitch downgraded French bank BNP Paribas’ long term rating to AA- from AA, citing deteriorating asset quality as the reason for its decision. The downgrade sparked fears of continued financial turmoil in Europe, related to the debt crisis. Economic data from the EU has been rather uninspiring and kept investors away from buying into the single currency, the German IFO business sentiment index rose to 101.8 from 101.5 in May while consumer confidence remained unchanged at 3.5% for the month of June. Risk aversion added to further euro weakness as US data impacted confidence amongst investors.

The G20 meeting was anticipated to have the European debt crisis as its main topic of discussion although speculation that global finance ministers would be unable to come to any definite resolution kept the single currency under pressure. Germany’s independent regulatory action banning naked short selling and requiring robust austerity measures from other EU member countries has had markets questioning the stability within the Euro-zone and thus the likelihood of a quick recovery.

The greenback continues to appreciate and depreciate on the back of investor sentiment. Economic data from the US created some safe haven buying of the dollar as traders questioned whether the European debt crisis has not had some impact in slowing the US recovery. US existing and new home sales both came out significantly lower than had been expected. US Annualised Q1 GDP  dipped slightly lower than expected but was offset by a strong increase in consumer spending and sentiment, the University of Michigan consumer confidence index increased to 76 from 73.6 the previous month. The Federal Reserve Bank kept interest rates unchanged at 0.25% and made note material changes to inflation or growth forecasts. Speculation regarding the G20 and mixed economic data has kept the dollar range trading against euro as the week closed out despite general investor confidence being a lot more positive. The change in sentiment could be seen in cable levels as the dollar closed the week trading near its weekly lows.

Next Week

Markets will open this week to the G20 communiqué although the likelihood of a definitive statement addressing the European debt crisis is unlikely given Germany’s recent independent action. A lack of unity could unsettle traders and allow for safe haven flows into the dollar. Market confidence restored after last week’s budget announcement and the commitment from the UK government to take aggressive measures to reduce Britain’s deficit may offset the G20 statement. Analysts are concerns though that lower spending could have a negative impact on growth and as such Wednesday’s  Q1 GDP release will be critical for the pound. Former BoE member Blanchflower, a known arch-dove, recently warned of the possibility for a double-dip recession in the UK and this could add to market jitters ahead of the GDP release. Mortgage and manufacturing data is not to be discounted though as these have also been highlighted as factors affecting economic recovery.

Apart from the UK GDP release, market focus will also be on US employment data; ADP employment and Non-farm payrolls figures are expected to indicate a slight improvement in the US job sector which will be key to keeping investor risk appetite alive. Recent safe haven trends have been triggered by a drop in US economic data as they called the stability of the recovery into question, due to the fact that investors are still not wholly convinced the European debt crisis will not impact the United States.

Economic Data Releases