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Foreign Exchange

Sterling traders should forget the Budget and look to clouds

The UK’s annual Budget statement had predictably little effect on sterling, but for those of a technical bent there are signs that the pound can trade higher.

George Osborne, UK chancellor, surprised few with his speech on Wednesday, given that most of the main announcements had been leaked to the press. A modest upward growth prediction was also widely forecast, while Osborne was never likely to make any grand give-away, given the UK government’s commitment to reining in the deficit.

That commitment would have been by hardened by last week’s warning from Fitch that the UK could be on track to lose its AAA sovereign rating if the government could not maintain its policy of fiscal responsibility.

Extra encouragement, if it were needed, for Osborne not to announce any give-aways to voters was provided by figures showing that the UK’s net borrowing rose twice as far as expected last month to £15.2 billion, a record for February.

Still, the UK broadly remains on track to achieve the borrowing targets set out by the UK’s independent Office for Budget Responsibility.

In the event, Osborne outlined a “fiscally neutral” Budget, insisting there was no alternative to the UK government austerity programme, adding that he would stick to tough spending cuts to retain the confidence of bond investors and to keep the government’s AAA sovereign rating.

The muted reaction in GBPUSD should not have come as much of a surprise. Cable has enjoyed a fairly good few recent sessions, but its failure to break higher through its 200-day moving average around $1.5870 suggests it might settle into a $1.56-$1.59 range in the short term.

“The Budget tends to have only a temporary impact on markets, as most of the detail is signalled by the chancellor well in advance and so the actual announcement rarely provides shocks to the market that is enough to drive price action in the medium term,” says Kathleen Brooks, research director at Forex.com.

Brooks says a much more interesting cross is GBPJPY, which broke an important level on Friday. The pair has broken through the top of the weekly Ichimoku cloud, a chart used widely by technical analysts, for the first time in four years.

 GBPJPY weekly Ichimoku cloud chart

 
 Source: Forex.com

Brooks says this could open the way for GBPJPY to trade up to Y140 in the coming weeks.

“This cross is unlikely to be driven by domestic concerns in the UK – unless we experience a negative shock in the UK like a credit-rating downgrade or a deep double-dip recession, neither of which we expect – but it is a good way to play yen weakness,” she adds.

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