Sterling set for busy Budget week

Published: 21 March, 2011

Sterling is set for a busy week ahead with the Budget, Bank of England minutes, inflation and retail sales figures all being released against a backdrop of air strikes in Libya and worries over a nuclear meltdown in Japan.

Currency rates

EURO/GBP - 1.1452

US$/GBP - 1.6239
CHF/GBP - 1.4694
CAN$/GBP - 1.5934
AUS$/GBP - 1.6186
ZAR/GBP - 11.3045
JPY/GBP - 131.791
HKD/GBP - 12.6578
NZD/GBP - 2.2131

SEK/GBP - 10.1693
US$/EURO - 1.4173

Risk sentiment has shifted to "war" mode as Allied forces launched air strikes exactly eight years after the Iraq operation began in 2003. Expectations for UK data are relatively strong this week, with the Budget set to deliver a better set of public finances than initially expected. Retail sales are expected to drop marginally as is the norm at this time of year, but inflation is expected to rise to 4.2% for February. Whilst this would normally see sterling strengthen, when set against a risk averse framework caused by military action, sterling is unlikely to follow normal trends. Either way it is set to be a volatile week.

In the euro zone, EU Finance ministers meet yet again in Brussels today to discuss proposals to tackle the sovereign debt crisis. This provides a final opportunity for debate before the EU Summit (March 24-25) at which any proposal is expected to be signed off. Recent proposals have gone some way to easing investor concerns, but the markets need more clarity on future bail-outs of countries. If this does not happen over the coming meetings, expect debt markets to punish that lack of clarity. After nigh-on committing to a rate hike in April, any change in tack from ECB policymakers following the situation in Japan and Libya is likely to cause euro weakness. ECB President Jean-Claude Trichet speaks today.

In the USA, further disappointing figures are expected from the housing market this week with existing home sales and house prices set to fall. The US housing market is a long way off from recovery. Friday sees the final figure for 4^th Quarter GDP which is expected to remain the same.

The Australian dollar outperformed overnight against other major currencies. The risk sensitive currency was given a boost following news that 2 out of 6 of the damaged nuclear reactors in Japan had been brought under control and progress was underway on a third.

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