by Jon Beddell
Foreign Currency Market Update – GBP / INR Update
After a period of high volatility, but ultimately little net change over the election week, Sterling fell yesterday on the release of trade data for March which showed the trade deficit widened to £7.5bn for march, up from £6.3bn in February.
Bank of England governor Meryn King gave a nod of approval to the new government’s pledge to cut public spending by £6bn this year. Delivering the quarterly inflation report King warned that the UK economy was still in danger, but that the planned cuts would be useful in showing the markets that government was taking action, preventing a possible run on the pound and selling of UK gilts. We saw what happened with Greek, Spanish and Portuguese debt over the last few weeks and the new administration will be doubly keen to avoid a similar fate for gilts. When investors feel that a government may not be able to meet debt repayments as they fall due, they demand a far higher interest rate for investing in new government bond issues. Paying a high rate compounds the debt problems and can force a default. So taking steps to improve the market’s perception of how we are tackling our debt mountain is almost as important as reducing the deficit. The BoE believe inflation – which is currently well above the bank’s 2% target – will moderate back towards 2% over the next two years. That gives policy makers the flexibility to keep interest rates low for the short term.
The Rupee has made a new high, breaking below the 66.00 level which had been working as support earlier in the week. That level was also the January 2009 low, and represents a key long term support zone. That this has now been broken could send the Rupee sharply higher. Clients with Rupee requirements should consider covering now in order to avoid further possible downside.
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