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Chancellor Osborne Presents 2013 Budget; Sterling Rallies on BoE Remit

Chancellor Osborne Presents 2013 Budget; Sterling Rallies on BoE Remit

Christopher Vecchio, CFA, Senior Strategist

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

Chancellor_Osborne_Presents_2013_Budget_Sterling_Rallies_on_BoE_Remit_body_Picture_1.png, Chancellor Osborne Presents 2013 Budget; Sterling Rallies on BoE Remit

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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