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Sterling falls ahead of Brexit Budget and looming US rate rises

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The Pound fell to $1.22 yesterday, a seven-week low, amid mounting concerns about Philip Hammond’s first Budget Statement and the prospect of interest rate rises in America.

Sterling has slid backwards in the past fortnight as investors sell positions in Sterling before the budget and the triggering of Article 50 and move into safer havens like the USD. This was also reflected in the GBP/EUR cross, with the lowest levels seen since mid-January and an overall drop in equity prices. Markets have reported that there was an Interbank liquidity slowdown of around 40-50% yesterday compared to earlier in the week ahead of the Budget and Fridays US employment numbers.

Ahead of today’s Budget, Mr Hammond was seen to disappoint markets by promising not to spend the windfall received from lower borrowing. Instead, his priority was “making sure that our economy is resilient, that we’ve got reserves in the tank” in case of any slowdown in the British economy after triggering Article 50 at the end of March. Mr Hammond will be buoyed by expected numbers from the Office for Budget Responsibility saying that UK growth for this year will match or beat last year’s performance and that borrowing this fiscal year will be around £12bn lower than previously thought.

The Budget is also expected to announce the expected increase in British business rates, which importers are going to feel most hard after 9 months of suffering a weak pound and uncertainty surrounding Britain’s exit from the EU.

Theresa May suffered a historic defeat in the House of Lords yesterday over an amendment to the Brexit bill demanding a “meaningful vote” on the final Brexit deal.  Peers voted on an amendment which means the parliamentary battle over the terms of Britain’s exit from the EU will return to the Commons next week. MPs have signalled their intent to overturn the amendment and another that guarantees the rights of EU citizens to remain in Britain post-Brexit.

The Brexit secretary, David Davis, described the passing of the amendment as “disappointing”. He said: “It is clear that some in the Lords would seek to frustrate that process and it is the government’s intention to ensure that does not happen. We will now aim to overturn these amendments in the House of Commons.” The loss of the lords is potentially frustrating to Theresa Mays timetable to trigger Article 50 on 31st March.

The prospect of up to three rate rises by the US Federal Reserve has further driven the downward pressure on the Pound. Federal Fund Futures are pricing in an 84% chance of a 25bp rise at the FOMC meeting next Wednesday, with the likelihood of a further increase in June priced in around 40%. This has come about from hints made by Janet Yellen last week. Unless Fridays Non-Farm payrolls and Average Earnings reports are shockingly poor then a 25bp rise next week is considered a shoe-in.

The Organisation for Economic Co-operation and development yesterday warned of financial market volatility as the US presses ahead with rate rises, which is expected to make the USD even stronger. The expected divergence in Monetary policy between the US and other top tier nations “heightens risks of financial market volatility and could lead to wider financial instability” the OECD said.

EUR/USD – Current Price $1.0568 (+$0.0001)

EUR/USD is little changed ahead of the European cash equity open after another narrow trading range in Asia. The low at $1.0558 matched yesterday’s low while the daily high came early in the session at $1.0574. Fresh impulses have been few and far between for the pair with investors sitting on their hands ahead of the ECB on Thursday and FOMC meeting next Wednesday. Slightly stronger German industrial production data prompted minimal reaction and it may well be a quiet morning with only French trade data and Spanish industrial production on tap. US ADP employment change due later this afternoon will be the main focus. From a technical view, today’s and yesterday’s low at $1.0558 forms our first resistance level ahead of the March 2nd/February 22nd low at $1.0495/$1.0494. On the upside, yesterday’s high at $1.0603 and Monday’s high at $1.0640 are in focus.

GBP/USD – Current Price $1.2204 (+$0.0004)

GBP/USD is little changed this morning having barely budged overnight with a narrow 16 pip range. The pair is just about managing to hold the $1.22 handle ahead of open having fell to a fresh seven-week low of $1.2198 yesterday after the UK government suffered another defeat in the House of Lords over its Brexit bill. UK data releases are absent this morning so investors will be looking ahead to the Spring budget announcement from around 12:30 GMT followed by US ADP employment change at 13:30 GMT. From a technical view, yesterday’s low at $1.2170 may offer some support ahead of the January 17th low at $1.2018. On the upside, yesterday’s high at $1.2252 and Monday’s/Friday’s high at $1.2299/$1.2300 are in focus.

USD/JPY – Current Price ¥113.69 (-¥0.30)

USD/JPY has edged lower overnight as risk aversion boosted the Yen after Chinese trade figures fell well short of market estimates – the pair hit a session low of ¥113.61. China ran a trade deficit of -$9.15 Bln in February (f/c. +$27.00 Bln) as exports dropped -1.3% Y/Y (f/c. +14.0%) although many economists have cited seasonal factors related to the Lunar New Year. Japanese GDP figures were also out and we saw a modest upwards revision the annualised rate to +1.2% (f/c. +1.5%) from +1.0%. Turning to the technical outlook, Monday’s low at ¥113.56 and last Thursday’s low at ¥112.77 may offer support while we look for resistance at yesterday’s high of ¥114.15 and Friday’s high of ¥114.75.

GBP/EUR – Current Price €1.1543 (-€0.0004)

GBP/EUR is little changed this morning after a fairly narrow trading range overnight of just 16 pips. The pair has suffered heavy losses in recent weeks and fell to a fresh seven-week low yesterday at €1.1516 after the UK government suffered another defeat in the House of Lords over its Brexit bill. UK data releases are absent this morning while we do not expect much reaction to French trade figures or Spanish industrial production. Investors will be looking ahead to the Spring budget announcement from around 12:30 GMT while we may also see some spillover from reaction to the US ADP employment change. Yesterday’s low at €1.1516 forms our first support level ahead of the January 18th low of €1.1485. On the upside, yesterday’s high at €1.1575 and Monday’s high at €1.1594 are in focus.

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