UK budget leaves sterling unmoved. The EU reaches another agreement to rescue Greece; this one might hold water.

A two-cent range took sterling from €1.1050 to €1.1250 and all the way back again. It opened in London this morning half a cent up on the week at €1.11.

After their experience the previous week when members of the Monetary Policy Committee twice spooked the market by mentioning ‘double-dip’ recession, investors were nervous when the governor of the Bank of England gave a speech to the Royal Society.

They need not have worried. Dr King did include a caution that ‘the level of activity is still very likely to remain weak for a considerable period’ but that was all. It was nothing the market couldn’t live with and sterling lived to fight another day.

Tuesday’s consumer price index data were no help to it though. Having spiked to 3.5% in January inflation fell back to 3.0% in February, just on the edge of its target range. The feeling was that the Bank might have been correct in its prediction that inflation would come back into line.

As it does so it removes any need for higher interest rates, instead reawakening the prospect (dim though it is) of further quantitative easing. Thursday’s UK retail sales figures were almost good. Rather than the +0.6% monthly improvement that analysts had predicted, sales rose by +2.1% in February. Unfortunately, a significant chunk of that improvement was wiped out by a downward revision to the January number.

Compensating for the relative shortage of UK economic data during the week was the Chancellor of the Exchequer’s election announcement on Wednesday. Of course he did not set a date for the vote, but some of the policies he announced were so theatrical that they could be nothing other than a campaign gambit.

The bilateral taxation agreement with Lord Ashcroft’s Belize raised a laugh. The imposition of a 5% stamp duty on Conservative voters’ palaces got a nod from the Morning Star and the stamp duty holiday on socialists’ quarter-million pound hovels brought a shrug from economists, who foresaw another distortion of the residential property market.

The Chancellor’s words had no effect on sterling; at the end of the speech it was exactly where it had been at the start. Investors are much more interested to see what the post-election spending review will bring.

Euroland came up with no ‘hard’ economic data during the week. All it could rustle up were a few subjective indicators. Provisional purchasing managers’ indices showed a two point improvement to 53.7 for the services sector and a similar rise took the manufacturing PMI to 56.3. Consumer confidence was steady at -17 and German investor confidence was up from 89.8 to 94.4.

The market’s attention was focused squarely on the negotiations surrounding the rescue plan for Greece. In recent weeks there has been no shortage of EU ‘agreements’ on how to bail out the Athens government from its pile of debt and downgraded bonds. Until last week none had stood up to scrutiny because of Chancellor Merkel’s refusal to commit German money to the effort.

On Thursday in Brussels the 16 euro zone members eventually came up with a deal that Fr Merkel was prepared to sign. The package includes a mix of national and IMF cash, together with guarantees, that would be brought into action if Greece became unable to sell the bonds it needs to shift in order to finance its debt.

On the positive side, the very existence of the agreement might be enough to persuade investors that they will get their money back if they lend it to Athens. On the downside, actuation of the rescue plan - were it to become necessary - would need the unanimous agreement of all the governments involved. The market is suspicious that Fr Merkel has signed a pact upon which she expects not to have to deliver. She retains the power of veto; would she use it?

Despite the doubts, the existence of the accord - complete with Germany’s signature - ought to be positive for the euro. Whether it will make it fly is a different matter but, at least for the time being, the Greek problem is on the back burner.

Since the beginning of the month sterling/euro has changed direction a dozen times and has gone nowhere. Buyers of the euro should hedge 50% of what they will need. If the money is required in the near future they should consider covering the whole amount.

Article by Moneycorp.

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