FX Strategy Weekly 12th March 2010

By Kenneth Broux and Altaz Dagha

Rising inflation expectations in the UK and confirmation that the Budget will be held on March 24 means GBP shorts may be forced to cover positions as government leaks emerge over the next two weeks of UK deficit reduction plans.

Ultra-loose monetary policy in the G7 and positive economic data surprises in the G10 are lubricating pro-risk strategies, with higher oil and equity prices supporting rallies, notably for the CAD where strong employment data may force the Bank of Canada to raise rates before the Fed.

A shift in the FOMC’s stance on low interest rates and ‘extended period’ rhetoric appears unlikely at the one-day meeting next week, and may put the trading emphasis on the BoJ meeting instead where new measures to counter persistent deflationary pressures may be discussed.

For the BoE MPC minutes (Wednesday), we doubt much will come out in terms of major new points of contention on the committee, though the surprise surge in the February services PMI (data trio of dismal retail sales, IP and foreign trade unknown to the MPC at the time) and the strongest Inflation Attitudes survey in two years may reveal a less conciliatory stance with regard to the possible extension of QE, lifting GBP to better levels to sell.

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* All charts are sourced to Lloyds TSB Corporate Markets Economic Research, Bloomberg, IMF and Datastream

 


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