Turbulence, Volatility and Uncertainty

Yesterday saw what was a particularly turbulent day for the pound, in particular against the Euro. Following the news from Cyprus at the weekend and the financial crisis that is unfolding there, the beginning of the week saw the pound jump 2 cents overnight against the Euro when the markets opened on Monday. However as the week progressed this gain started to erode in the run up to yesterdays UK BoE minutes and Budget, with the markets moving as they often upon rumour as many predicted a weak UK budget and further indications of QE likely.

Indeed yesterday was a particularly volatile day for the GBP/EUR cross – following the minutes in the morning which showed no change to the internal vote for QE (which remained at 6 vs 3 against) this was largely taken as a positive and perhaps surprisingly the pound regained its previous losses returning to a similar level as it was Monday. However as the day progressed the GBP/EUR rate yo-yo’d heavily with an unusual degree of instability seen – just highlighting the current volatility particularly in this pairing.

The afternoon saw the UK budget released, which has a more long term effect on the markets as it sets out plans for the coming year and therefore doesn’t have the same raw impact as other releases.

With UK growth forecasts cut to 0.6% from 1.2% and national debt due to continue to rise until 2018, all in all it wasn’t a particularly good indication of the current or future UK economy. Cries of “downgraded Chancellor” could be heard in the House of Commons and indeed Business Secretary Vince Cable has said the UK economy is “flat-lining” and that he didn’t know when the “age of austerity” may end. However despite this relatively poor budget news and albeit fierce levels of movement, the pound held fast and maintained the gains against the Euro seen earlier in the day.

These gains (most largely driven by the BoE minutes) were also seen against the dollar, and this morning the pound’s gains have continued ahead of prediction that UK retail data released today will show the first increase since September last year. The pound is now at a two week high against the dollar and is almost back at the peak it reached against the Euro early this week when the Cypriot economic emergency was announced.

Take note however… despite these short term gains, one must look at the larger picture. The US is largely en route to financial stability and has avoided the fiscal cliff at least in the short term, and whilst although the Cypriot situation is a bad one with the now increased support of the ECB it is far from likely we will see it return to the levels we saw at the height of the Eurozone crisis last year. Certainly the Cyprus situation will continue to play out but as the news from yesterday’s budget sinks in and with the ever looming fear of further QE and what it might do to the pound, we are far from safe in regard to the pound losing ground again. With a relatively quiet week in the way of major data releases no doubt the budget and Cypriot crises are likely to be the major factors in market movements with the effect perhaps yet to be played out.

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