Currency Market 31-Jan: All Eye on Budget

Globally, Bank of England decided to keep interest rates unchanged at 0.75% with 7-2 majority. BoE now expects that UK economic activity might pick-up in the short term amid a recovery in global growth and reduced uncertainty over Brexit. It is noteworthy that UK’s PMI have spiked to multi-month high levels, suggesting early sign of turnaround in UK. Consequently, GBP/USD pair surged to 1.31 handle and it might test near term resistance at 1.3150-70 levels. On other hand, WHO recognised ‘Novel Coronavirus Outbreak’ as a public health emergency of international concern (PHEIC) . USDCNH pair, which had spiked above 7.00 handle, is trading near 6.9760 levels and USDJPY pair, which had fell to 108.57 levels, is trading near 109 handle.  

On domestic front, India’s CEA, Krishnamurthy Subramanian will present Economic Survey 2020 and it will set the tone for Budget tomorrow. Given, lower tax revenue and weaker disinvestment activity Government is very likely to miss fiscal deficit target of 3.3% in current FY. However, given the broad economic slowdown it is expected that government will take leeway available in the FRBM to allow fiscal deficit to worsen. Since, government expenditure should be counter-cyclical in nature, government should continue with a higher deficit in the next fiscal, along with fresh time line to achieve 3% fiscal target. In larger time frame, Bond markets have been trading with bearish bias on expectation of worsening fiscal deficit. Thus, budget should provide fresh leg of movement and “Buy the Rumours sell the facts” nature of financial markets might lead to a rally in bond prices. On currency front, USDINR pair is trading flat near 71.43-44 levels. USDINR pair has immediate resistance at 71.56 levels and immediate support at 71.30 levels. Day range seen as 71.30-71.56 levels.