Currency Update – 21 March 2023

GBP
In any normal week, the UK Budget would make major headlines for markets. This week being what it was, the Budget* came and went without too much of a fuss, and this may be party due to the fact that the chancellor pretty much stuck to expectations in terms of changes as he outlined his plans for growth. For any of you who may have missed the details, and as expected, the previously announced increase in corporation tax from 19% to 25% was carried through. In other tax benefits, Hunt froze fuel duty for another year, scrapped the lifetime allowance on tax-free pension contributions and extended the government’s help with energy bills for another three months.
Chancellor Hunt also stated that the OBR (office of budget responsibly) now think that the UK will avoid a recession this year. That statement looks realistic given the recent news that growth exceeded estimates, yet again. It is also quite an achievement given how downbeat expectations were for the UK economy, just a few months ago. In other news, the recent trend of stronger than expected UK economic data continues, with the latest employment report highlighting that key ILO unemployment remained at 3.7%, having been expected to have risen to 3.8%.
Despite all of this, next week’s BoE meeting now has an air of mystery around it, given events elsewhere. The chances of a halt in rate rises from the BoE have increased substantially since Monday, but as we have said on the FOMC (see USD) we will have to wait and see how markets settle before the meeting, and then what the BoE ultimately think about it all.
As for the pound, well the broader pound has had a sterling week, with GBP/EUR rising to a two-month high, and posting steady gains elsewhere, as the risks of a UK economic underperformance diminish considerably. GBP/USD has also remained above 1.2000, yet below 1.2200, which is also a fairly solid return for the pound, given the moves in favour of the safe-haven dollar elsewhere.
*We have published a separate Budget summary. Read here
EUR
In a much anticipated move, the ECB raised Euro area rates by 50bps from 2.5 to 3% yesterday, resolutely sticking to their forward guidance. Several members within the ECB had voted for a pause, according to Christine Lagarde. However, the hike came after a week of heightened market turbulence, with bank stocks in particular coming under intense selling pressures, after the SVB crisis morphed into a broader run on supposedly vulnerable assets. In Europe, Credit Suisse was forced into seeking a CHF50bn lifeline from the Swiss National Bank (SNB), with part of the package including the buyback of CHF3bn of their debt, as the bank attempted to boost liquidity and calm nervous investors. The SNB are set to announce their latest interest rate decision next week.
Despite the ECB telling us otherwise, their latest hike was no forgone conclusion, with markets also clearly split on whether it would be the right move from the ECB. Fighting inflation is one thing, but if the ECB are raising rates into an economy that suddenly falls off a cliff, then they could be forced to reverse their decision fairy quickly, as inflation will quickly take care of itself in that environment. Of course, were they to have paused yesterday, then a nervous market could rightly question whether the ECB knew more than the rest of us, and that itself could have then led to further market disruption. Darned if you do, darned if you don’t. The ECB did remove the line suggesting that they will ‘keep raising interest rates at a steady pace’, from their accompanying statement, which is a clear sign that yesterday may be the last hike for a while, which makes sense to us. The immediate market reaction has been fairly positive, but these are early days, and we are not out of the woods yet.
As for the single currency, well EUR/USD has remained at the mercy of the broader dollar moves, despite remaining within a 1.0500 – 1.0700 range for the most part. If markets settle, then a break above on the topside looks favoured, however, this fluid backdrop makes short-term directional outcomes far harder to call. As for key data, next week is dominated by regional PMI data, assuming that markets move on and revert back to focussing on the numbers again.