There have been three major sterling trigger events scheduled for this week.  Tomorrow's UK budget is the clear front runner, today's Feb UK CPI data and the release of Feb UK retail sales later in the week are the other two.  The pound was always going to head into the budget on the back foot.  The Labour government has pledged that it would be dangerous to introduce too much austerity too soon suggesting there is risk that the Chancellor will not lay out a credible and adequate plan for tackling the budget deficit tomorrow.  That said, speculation that UK inflation could prove to be sticky and that Feb retail sales data could show that Jan weakness was weather related have been suggesting that sterling's losses this week could be offset.  In the event cable slipped further on the release of the Feb CPI release.   The release came in slightly weaker than expected at 3.0% y/y.  While this is still well above the BoE's 2.0% inflation target, the fall from 3.5% y/y in Jan is consistent with the BoE's view that the inflation rate will fall back significantly in the months ahead as last year's oil price rises and the Jan VAT hike fall out of the index.  Hawks continue to warn that sterling weakness will underpin the CPI in the months ahead suggesting that inflation will remain a contentious topic, but for now there is no increase in the risk that the BoE will be forced into raising interest rates before the end of this year.   Cable is currently holding close to the USD1.500 level, having retraced its initial post data losses.  For cable to move significantly higher, the Chancellor must tomorrow announce a set of measures which will take the budget deficit in hand and kick into touch the threat of a credit rating downgrade.  

Demands from EU President Van Rompuy that a solution on the Greek situation must be found ahead of this week's EU summit, slightly increase the possibility that Greece will get support from the EU.  However, insofar as the German government must consider the impact of any decision it makes in the light of local elections in early May, it does seem unlikely that Chancellor Merkel will make an about turn on her tough position with respect to Greece.  EUR/USD fell hard ahead of the European open but has subsequently found decent support above the EUR/USD1.3500 level.  Greek PM Papaconstantinou reiterated the point that Greece is able to service the debt.  This underpins his point that he is not looking for financial support (at the moment) but a mechanism which would offer guarantees for Greek debt and thus reduce the cost of funding on the open market.  

EUR/CHF has managed further losses this morning, despite another warning from the SNB that it would counter excessive gains in the CHF.  Clearly the weakness of the EUR is increasing the pressure on EUR/CHF but the SNB's lack of any specific objection to current levels and its recent indication that at some point in the future exchange rates will be guided by market forces have increased the market's will to test the resolve of the SNB.  EUR/USD has reached a fresh low of 1.4309.  

USD/CAD is hovering close to the 1.0200 level at present, this afternoon's Canadian Feb leading indicators are the next key focus for the CAD. US existing home sales, the Richmond Fed index and ABC consumer confidence are also due.

Jane Foley
Research Director