Chancellor George Osborne opted against a big fiscal squeeze in the Government’s latest budget statement and uncovered new policy responsibilities for the Bank of England, which were not as sweeping as some investors had expected, leaving traders backing the British pound relieved and the currency moving higher. The relief saw sterling rise to a two-week high, supported further by the Federal Reserve’s latest monetary policy decision. Although the Fed noted signs of faster US economic growth, Chairman Ben Bernanke gave investors little to suspect an easing of the Fed’s unlimited quantitative easing project. The eurozone is now taking its turn on the monetary policy front, with the euro dropping sharply after PMI surveys from both Germany and the wider euro area displayed deteriorating business activity, increasing calls for looser European Central Bank policy. Adding to the euro’s woes, lawmakers in Cyprus will now keep banks closed until next week as they scramble to come up with a ‘Plan B’.
Sterling
The pound stood firm in currency markets after minutes from the Bank of England missed dovish expectations and UK Chancellor George Osborne announced a more comfortable change to the central bank’s new monetary policy remit. Minutes from the central bank’s March policy meeting showed strong support for holding back on additional quantitative easing and policymakers also voiced concerns about the pound’s weakness, signalling to markets that sterling’s recent sell-off may have been overdone.
US dollar
The US dollar headed lower after the Federal Reserve announced no let-up in its asset purchases programme to support the US economy. Nevertheless, the currency still remains broadly underpinned by safe haven demand after Cyprus decided to keep its banks closed all week in an unprecedented attempt to secure a bailout deal.
Euro
Central bank announcements from the UK and US saw investors’ concentration move away from the eurozone and Cyprus but the single currency’s weak start could be a sign of things to come. A disconnection between governments across the 17-member bloc flared after Cyprus rejected plans to use depositors’ cash in the country to make-up part of its bailout. With Germany insisting that Cypriot bank’s must come up with about €6 billion of cash, lawmakers in Cyprus will now keep banks closed until next week as they scramble to come up with a ‘Plan B’.