The pound has begun the day under pressure amid a cautious market mood as traders await the outcome of US president Joe Biden’s meetings with NATO and G7 leaders in Brussels today. In a half-yearly budget update overshowed by the conflict in Ukraine, Chancellor Rishi Sunak announced a 5p cut in fuel duty and an increase in the threshold at which people pay national insurance contributions. With the war in Ukraine forcing the Office for Budget Responsibility (OBR) to sharply downgrade its forecasts for growth, Sunak warned parliament that the “sanctions of unprecedented scale and scope” Britain had imposed on Russia were “not cost-free” and posed a risk to the recovery of the UK and international economies. New forecasts from the OBR predict economic growth of 3.8% this year, much less than the 6.0% it had projected in October.
The euro remains pressurised for the second consecutive day against the dollar as risk aversion underpinned the greenback in early trading. With fresh sanctions expected against Russia expected following President’s Biden’s meeting with EU leaders today, the possibility of a ban on Russian oil imports is weighing on the single currency. Whitehouse National Security adviser Jake Sullivan said before Biden’s trip that reducing Europe’s reliance on Russian energy has been a “substantial” topic and the subject of “intense back and forth” talks in recent days. Although energy supply worries have partially eased after Qatar agreed to increase gas exports to Europe, the agreement is a longer-term solution and for now Europe would find it difficult to ban the supply of Russian gas which makes up 40% of the amount it uses.
The dollar has capitalised on safe-haven flows in early trading. The cautious market mood ahead of President Biden’s meetings today has helped the greenback preserve its strength against its major rivals and driven the US dollar index to approach the key 99.00 level. St Louis Federal Reserve Bank President James Bullard yesterday called on fellow policymakers to think “bigger” and act “faster” on raising interest rates given that inflation is “way over” where it ought to be. Bullard also told the Mid-Size bank Coalition of America that he expects inflation to rise further this spring but could be brought under control by next year. Earlier this week, he called for a dramatic increase in the Fed’s overnight lending rate to more than 3% this year. Several Policymakers are due to speak later today.