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Pound sterling is on the verge of printing a new multi-month best for euro buyers, with the budget being of little concern, yet.
The pullback Pound Sterling Live and others have been waiting for has not materialised, with the Pound to Euro exchange rate running hot into Chancellor John Healey's first Budget and within reach of Friday's 17-month high at 1.1959.
Our week ahead forecast looked for consolidation and a shallow dip this week, and Crédit Agricole's fair value model opened a short on the pair on Monday with a take-profit at 1.1811, yet the pair trades at 1.1943 and has drifted higher since!
It is extending an historically extraordinary period of overbought conditions, with the Relative Strength Index (RSI), a momentum gauge where readings above 70 mark an overbought market, holding above that threshold for a third week.
Above: GBP/EUR at daily intervals with the 21-day moving average and the RSI in the lower panel.
Even a pre-Budget repositioning lower has not halted the advance, and the euro has drawn no support from Moody's decision late on Friday to spare France a downgrade, which sent French bonds higher without lifting the single currency.
Investment bank analysts expect a quiet Budget, which is why the market has placed so few hedges against it.
"Budget week for the UK but truth be told it does not seem like it will be a big event. The most market unfriendly tax grab, on Banks, has already been leaked and digested while the recent strength in UK growth data and relaxation in global yields has come at a simply wonderful time for Healey and Burnham," says a note from J.P. Morgan's London FX trading desk.
The desk rates sterling neutral for the week and puts support in EUR/GBP at 0.8333, equivalent to 1.20 in GBP/EUR, with resistance at 0.8425 to 0.8435, or 1.1856 to 1.1870.
OCBC says a Budget that preserves a meaningful fiscal buffer while maintaining a credible tightening path should keep the UK fiscal risk premium contained, which together with continued foreign demand for gilts would remain supportive for the pound.
Nevertheless, it is worth looking at our piece from Tuesday, which warns against exuberance as there are pitfalls that the Chancellor must navigate, including a Lloyds Bank benchmark of just over £50bn in policy revisions beyond which a low-key Budget becomes a market event.
The rate pricing that underpins the pound is the other pitfall, with OCBC's base case of one insurance hike from the Bank of England by year-end sitting well below the series the market prices.
"With substantial tightening already discounted, the bar for further GBP outperformance looks increasingly high," says a daily note from OCBC, the Singapore bank.
Spot sits more than a percent above its 21-day moving average, and our in-house modelling says the gap closes through a pullback or consolidation, with the Budget at 12:30 the event most capable of forcing the pullback route.
A quiet Budget keeps 1.19 as the floor and puts 1.20 in play, a level J.P. Morgan already marks as the next support for the euro.
