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Wednesday, March 21, 2007

GBP/USD: Sanguine Reaction to Brown's Final UK Budget

Cable traded in a calm manner through UK Chancellor Gordon Brown's 11th and final budget, and currently resides near 1.9585 the level at which it stood into the budget. Brown's key announcement was a surprise cut in the basic rate of UK income tax to 20%, from 22%, as of April 2008 (FT website).

The pound's steady price action during the budget was in marked contrast to European morning activity. Cable ascended to 1.9650 offers in early European trade, on the back of yesterday's hawkish Barker comments. It then tumbled to a low of 1.9556 following the 09:30GMT publication of March 7/8 BoE MPC minutes detailing an 8-1 vote surprise.

The subsequent recovery rally to 1.9623 (today's Asian session top) was attributed to a perception that the minutes represent "old news" re: yesterday's UK CPI upside surprise. Today's key US event risk is the 18:15GMT FOMC statement to accompany an (expected) unchanged Fed funds rate verdict. The market is reportedly prepared for a more dovish than hawkish statement.

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