Chancellor Osborne Presents 2013 Budget; Sterling Rallies on BoE Remit

THE TAKEAWAY: GBP UK 2012 Budget Announcement by Chancellor of the Exchequer George Osborne > GBPUSD BULLISH

The second of two major events out of the United Kingdom today provided another modestly bullish catalyst for the world’s oldest currency, the British Pound. Earlier today, the Bank of England expressed some concern over the Sterling’s free fall, according to the March meeting Minutes, and provoked a rally in GBP-based pairs given the stance that a weaker Sterling could drive up inflation, which would hurt the economy. Seemingly, a higher rate of inflation would not be tolerated by BoE policymakers, even as improving growth prospects remains a priority.

Thus, while the British Pound is rallying after Chancellor Osborne’s budget announcement in parliament today, the focus is much less on the fiscal picture. The fiscal side of the equation remains muddled, with the government cutting the 2013 GDP forecast to +0.6% from +1.2%, and the 2014 GDP forecast to +1.8% from +2.0%.

Instead, the impetus for the Sterling’s rally was the slight alteration in the Bank of England’s remittance, which would allow for “forward guidance,” a policy that the Federal Reserve uses to communicate policy more effectively. Absent from the change in remit was a shift in the BoE’s inflation target, which remains +2.0% y/y.

There was chatter ahead of the budget release that a higher rate of inflation would be allowed to provide wriggle room for more QE; however, with the inflation rate still targeted at +2% y/y, it means that British consumers’ purchasing power will be sought to be preserved as much as possible. For now, this is viewed as marginally positive for the GBP, although the big picture remains: the British economy continues to struggle and is on the third leg of the recession.

GBPUSD 1-minute Chart: March 20, 2013

Charts Created using Marketscope – Prepared by Christopher Vecchio

The GBPUSD was quite volatile during the course of the budget presentation, falling immediately off the bat, from 1.5120, quickly back towards the lows at 1.5040. However, by the time Chancellor Osborne’s speech was finished, the GBPUSD had rallied sharply and recovered to as high as 1.5165. It should be worth noting that the GBPUSD only rallied after the monetary argument was set forth – the fiscal update provided little relief and prompted the sell-off back towards the daily lows.

--- Written by Christopher Vecchio, Currency Analyst

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Pound Rallies as No New BoE Members Voted to Add to Stimulus

By Benjamin Spier 20 March 2013 10:38 GMT THE TAKEAWAY: BoE voted 6-3 to keep asset purchase target unchanged -> UK jobless claims falls less than expected -> Pound rallies

The Bank of England announced in its minutes today that the vote to not add to the asset purchase target remained at 6-3 for the second straight month. The minutes refuted earlier speculation that more BoE members had voted to increase stimulus, which is why the Pound jumped about 100 points against the US Dollar following the release.

Majority of BoE members agreed that there are limits to what more QE can now achieve, while a minority said further easing could help smooth economic adjustments. Furthermore, most MPC members were worried that further Pound weakness could lead to an unwarranted drop in Pound. BoE Governor King, along with Fisher and Miles, voted for an increase of 25 billion Pounds to the asset purchase target.

The Bank of England members agreed that growth is likely to pickup in 2013. The UK GDP declined 0.3% in Q4, and is now one quarter away from entering a technical triple dip recession. UK inflation was reported at a ten month high of 2.8% in February and well above the BoE’s 2.0% inflation target. BoE’s King said in February that trying to subdue inflation may hurt growth.

Also released today, the UK jobless claims change decline by 1.5 thousand in February, which was less than the expected 5 thousand person drop in jobless claims and down from January’s revised 10 thousand decline in jobless claims. The ILO unemployment rate remained at 7.8% in January, as was expected.

The British Pound found its way well above 1.5100 against the US Dollar following the minutes announcesment. GBP/USD will see further event risk today when UK Chancellor Osborne presents the 2013 budget to the parliament. The pair may see resistance at 1.5201, by the 23.6% Fibonacci retracement of the decline from January’s high to March’s low.

GBPUSD Daily: March 20, 2013

Chart created by Benjamin Spier using Marketscope 2.0

-- Written by Benjamin Spier, DailyFX Research. Feedback can be sent to bbspier@fxcm.com .

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20 March 2013 10:38 GMT

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US Housing Starts Increases; USDCAD Rallies

By Renee Mu 19 March 2013 13:01 GMT THE TAKEAWAY: [Housing starts in U.S. rose 0.8% in February; Building permits increased 4.6% ] > [Record-low borrowing costs and stable property prices help boost housing construction activity] > [USD/CAD Bullish]

U.S. New housing construction and applications and building permits in February increased to their highest levels in nearly 5 years, signaling that the housing sector is picking up at a stable pace. According to a report released jointly by the U.S. Consensus Bureau and the Department of Housing and Urban Development today, the number of privately-owned housing starts accelerated by 0.8 percent to a seasonally adjusted annual rate of 917,000 in February, following 910,000 housing starts the previous month that was upwardly revised from 890,000 originally reported. The latest print comes in well above the median estimate of 915,000 housing starts according to a Bloomberg News survey.

Meanwhile, building permit approvals rose 4.6 percent to an annual rate of 946,000 in February from a downwardly revised reading of 904,000 in January. The consensus estimate of 91 economists surveyed by Bloomberg News had projected a rise to 925,000 approvals.

With close to record low mortgage rates and increased property value, housing market has gain more confidence in U.S. The better-than-expected reports indicate that the improving housing market helps boost the economy and provide supports to maintain stable growth in coming months.

USDCAD 1-minute Chart: March 19, 2013

Chart created using Marketscope 2.0– Prepared by Renee Mu

In the minutes following the data release, the U.S. dollar rallied against the major currencies, with USDCAD rising 10 pips to C$1.0243. As the market gains confidence, the greenback extended advance after the report. At the time of this report was written, the USDCAD was trading higher at C$1.0250.

--- Written by Renee Mu DailyFX Research

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19 March 2013 13:01 GMT

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