Key Points
FOMC drops reference to possibility of additional policy firming, but still sees upside inflation risks.
The move is comforting for equity markets- US rate expectations return to month lows.
Future Fed policy will continue to depend upon the data, as will USD sentiment in general.
AUD upside opening up further with 0.80 seemingly conquered.
Brown bows out with another masterclass in fiscal chicanery. MPC minutes negative for GBP.
South African current account, UK retail sales and CBI survey feature today.

Market Outlook
The most notable change in the FOMC statement is the part relating to possible future policy actions. Whereas previously the FOMC referred to 'the extent and timing of any additional firming that may be needed' they now state 'future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.' This means that a large element of the tightening bias has been dropped, although the paragraph on inflation shows that they still clearly see upside risk on price pressures. 'Recent readings on core inflation have been somewhat elevated. Although inflation pressures seem likely to moderate over time, the high level of resource utilization has the potential to sustain those pressures.' Followed by 'in these circumstances, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected.'

Equities rallied sharply on the news, reflecting the fact that the market now sees the Fed as being more ready to take account of the possible downside risks to growth (i.e. housing)- a renewal of the old 'Greenspan put' perhaps. However, policy will remain data dependent and an element of so-called tightening bias is still implicitly conveyed by their comments about inflation.

Indeed, another way of looking at the situation is to say that by responding in this kindly way (stabilising the equity market and helping bond yields lower) the FOMC is heading off one downside risk to growth i.e. the danger of the market talking itself into a recession. In so doing, they are reducing the risk of being faced with an awkward situation in the immediate future, namely, external pressure for a rate cut against a stubbornly high inflation backdrop.

The response in the money market was a more sober one. There was a softening in rate expectations, although only back to where they have been on other occasions over the past month or so. Rate expectations remain above the depths to which they sunk after the weak November ISM released in early December.

The USD is weaker against most currencies, except the JPY, which is not surprising as the support for equities means higher risk appetite (not good for the JPY). In the short-term, there is likely to be more in this USD move, although EUR-USD is likely to struggle to breach 1.35. Whether Fed rate cut expectations gather any further pace will depend upon the data in the coming months. Weaker data will leave the risk of an upside break on EUR-USD. Stronger data and a reining in of rate cut expectations would see EUR-USD pulling back to 1.30 and possibly lower. There is clearly room for volatility in response to the ebb and flow of the data, meaning that the data now perhaps holds even greater market relevance.

The JPY is likely to weaken further on the non-USD crosses in the short-term, while the development is good news for the AUD in its attempt to secure a position above 0.8000. This now appears to have been achieved and unless there is a major recovery in USD sentiment in the next couple of days a move to 0.8200-50 could quickly follow.

Yesterday's UK Budget was a typical 'smoke and mirrors' affair, full of Brownesque trickery. His speech was happy to highlight the headline grabbing tax give-aways, while most of the clawbacks were left to the small print of the Red Book. The basic rate of income tax is cut to 20% from 22%, but the 10% starting band is eliminated. There is a big rise in the threshold at which earners pay the 40% higher rate of income tax, but an even bigger increase in the National Insurance bracket (the other income tax). Corporate tax is cut to 28% from 30%, but a number of capital allowances are eliminated and the corporate tax rate for small businesses actually goes up to 22% from 19%.

The implications for GBP are neutral, although the most significant news of yesterday came from the MPC minutes. The key observation was 'the initial recorded outturns for recent wage settlements and relatively subdued inflation expectations led the Committee to judge that the upside risk to inflation from wage growth might have started to diminish.' This comment was made before the release of the latest average earnings data, which was weaker than expected and more than offsets the bad news from this week's inflation data. Overall, this would appear to rule out a hike in April and reduces the risk of a May rise, although the market is likely to continue discounting a May hike for now. The development is negative for GBP, although today's price action will also be determined by retail sales and CBI data (see below).

Day Ahead
South Africa - the Q4 current account data is due this morning and a widening in the deficit is likely. Trade concerns have taken something of a back seat in recent months, although the monthly visible deficit has been widening in trend terms. The outcome of this data will have a bearing on the ZAR, although a bad number will be needed to offset the support for the ZAR emanating from the weaker USD and more stable global markets.

UK - retail sales and the monthly CBI survey feature and the market will be interested to see whether the extreme outcomes seen on both indicators for the previous month are reversed. Retail sales fell sharply in January, although this seemed at odds with various other retail surveys. Last month's CBI survey, on the other hand, was unusually strong, with both orders and output balances the highest seen since 1995. There is a risk of a stronger retail sales number today.

Diary
Data/event BST Consensus*
 
ZA Current account (Q4) 09.00 -Z131.3bn
ZA Current account % of GDP (Q4) 09.00 -7.6%
GB Retail sales (Feb) m/m 09.30 0.6%
EU Manu orders (Jan) m/m 10.00 -1.0%
EU Trade balance (Jan, sa) 10.00 -?0.7bn last
GB CBI manu trends survey (Mar) 11.00
US Initial claims (w/e Mar 17) 12.30 323k
US Continuing claims (w/e Mar 10) 12.30 2576k last
US Lead indicators (Feb) m/m 14.00 -0.3%
BE Business confidence (Mar) 14.00 2.9
US Fed's Kroszner spks on credit markets 16.30
US Fed's Kohn spks on asset pricing/credit risk 17.30
JP All-industry index (Jan) m/m 23.50 0.9%
Latest data Actual Consensus*
US FOMC rate announcement unch unch
JP MoF manu survey (Q1) 0.1 7.1 last
JP MoF all-industry survey (Q1) 6.2 6.4 last
JP Trade balance (Feb, sa) ?655bn ?426bn