The pound held relatively firm against most currencies last week as the UK Budget reconfirmed the government’s commitment to curb spending, reports financial experts Hargreaves Lansdown.
Public borrowing is expected to fall from £120bn in 2012-13, to £21bn by 2016-17. Although the national debt is still expected to climb from 67% to 76% of Gross Domestic Product (GDP) over the next three years, many view the UK’s AAA credit rating as being dependent on debt stabilising by the end of the current Parliament in 2015.
The UK inflation rate fell less than expected in February, from 3.6% to 3.4%. This prompted some concerns that rising energy and fuel prices could delay inflation returning to the Bank of England’s (BoE) 2% target in the coming months. Reflecting a range of opinions between BoE policymakers, the latest policy meeting minutes showed two out of nine voters wanted an extra £25bn quantitative easing boost to guard against weak growth and sharply falling inflation.
The euro was able to gain ground against sterling late in the week, aided by there being little in the way of major developments regarding the euro zone’s sovereign debt crisis. However, it appears the austerity measures needed to control public spending are weighing on economic activity; a second consecutive fall in the euro zone purchasing managers’ report suggested the region might have re-entered recession in the first quarter of 2012. In brighter news, a rise in consumer confidence pointed to a more optimistic mood in response to efforts to get to grips with the crisis.
The US dollar avoided significant losses against the pound, bolstered by its status as a perceived safe-haven as global stock markets pared some of their recent gains. The US housing market provided a domestic influence for the dollar, with housing construction starts and sales of new and existing homes all declining in February. However, home sales are around 10% higher than levels seen a year ago, against a backdrop of stabilising house prices.
Sterling rose to its highest levels versus the Australian and New Zealand dollars for two months. The moves followed weaker-than-expected Chinese manufacturing data, which reinforced fears about a deeper slowdown in the world’s second-biggest economy. China is Australia’s largest trading partner and a slowdown could hinder demand for Australia’s natural resources. A separate report showed New Zealand’s economic growth slowed more-than-expected in the final quarter of 2011, adding to the case for interest rates to be kept at a record low of 2.5% in the near-term.
The South African rand, another commodity-led currency, also fell sharply against the pound as commodity prices weakened. An unexpected drop in South Africa’s consumer inflation rate from 6.3% to 6.1% in February could ease pressure on the central bank to lift interest rates and contribute to the rand’s decline. Ahead of the central bank’s latest policy announcement this week, interest rates have remained at 5.5% since November 2010.
The week ahead
A number of UK economic releases will impact on the domestic outlook and sterling this week. A third estimate of the UK’s GDP (Wednesday, 09.30am) is expected to confirm earlier estimates that the economy shrank by 0.2% in the final quarter of 2011. Mortgage approvals data (Thursday, 09.30am) will shed some light on the housing market’s outlook. The GfK research institute’s measure of consumer confidence (Friday, 00.01am) is expected to show confidence remains fragile amid high unemployment levels.
The health of the euro zone’s largest economy will impact on the euro’s performance this week; releases relating to Germany include consumer price inflation data (Wednesday, 07.00am), unemployment data (Thursday, 08.55am) and retail sales data (Friday, 07.00am). Euro zone consumer price inflation data will follow on Friday at 10.00am. Government debt auctions in Spain (Tuesday, 08.30am) and Italy (Thursday, 09.10am), along with Friday’s meeting of Ministers for Economic and Financial Affairs, will be used as a gauge for progress in tackling the region’s debt crisis.
The health of the ever-important US consumer could prove critical for the US dollar this week. The Conference Board, a research association, will provide its measure of consumer confidence on Tuesday at 15.00pm. The widely watched Reuters/University of Michigan measure of consumer sentiment will follow on Friday at 14.55pm. Personal consumption expenditures data (Thursday, 13.30pm) will showcase the strength of consumer spending. A third estimate of US GDP in the final quarter of 2011 will be released at 13.30pm on Thursday.
Commodity price trends and the outlook for the global economy are likely to continue to be a major focus for commodity-bloc currencies, such as the Australian and New Zealand dollars. Indicators of domestic economic health will include New Zealand business confidence data (Thursday, 01.00am) and Australian private sector credit growth data (Friday, 01.30am). South African rand domestic interests will turn to the Reserve Bank’s interest rate decision, to be announced at a media conference on Thursday.
A raft of Japanese data on Friday will have implications for the global economic outlook as well as the Japanese yen. Japan’s inflation rate (data due at 00.30am) remains exceptionally low despite a relatively low level of unemployment (data also due at 00.30am). Industrial production data (due at 00.50am) will highlight whether a strong yen is continuing to bear down on manufacturing activity.
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