The Pound declined heavily against the majors yesterday, falling through a number of key support levels to a low of $1.4399 against the Dollar, ahead of UK economic data releases and the budget presentation. The UK currency also registered sharp losses versus the Euro, falling to a low of 1.1120, after the Treasury said that it will sell a record amount of gilts this year, in a effort to lift the economy out of the worst recession since the Second World War.
The London-based Debt Management Office said it plans to raise £220 billion from gilt sales in the year through March 2010, significantly higher than the £180 billion expected. The Pound also lost ground against the Yen and Swiss Franc, as the announcement encouraged investors to sell out of high-yielding currencies and seek the security of safe havens.
The Chancellor of the Exchequer Alistair Darling presented his annual budget to Parliament yesterday and predicted that the UK economy will contract 3.5% this year. Darling announced a larger-than-expected budget deficit of £175 billion for the fiscal year starting in April with only a marginal decline the following year.
In the aftermath of Darling’s growth forecasts, the International Monetary Fund predicted that the UK economy will contract 4.1% this year, with the recession continuing in 2010. According to a separate report from Citigroup Inc, this year’s shortfall of 12.4% of GDP will be the biggest peacetime deficit in more than a century.
Darling said that the recession will be the worst since the Second World War. The Treasury will borrow £269 billion, more than estimated in November, and will raise taxes by £3.2 billion on people earning above £100,000 a year. Tax increases were also announced for the following year to help trim the deficit, raising a further £6 billion through duties on alcohol, tobacco and fuel.
People earning in excess of £150,000 a year will pay 50% of their income in tax and lose tax breaks for pension contributions. The new rate is five points higher than anticipated in November and will unravel Margaret Thatcher’s Conservative budget in 1988, which eliminated all tax rates over 40%. The UK financial services industry will probably lose 140,000 jobs this year, while 25,000 of the richest taxpayers may flee the country.
Borrowing at this level would represent 12% of UK gross domestic product and this is on the basis that the economy will begin to stabilise before the end of the year, which is more optimistic that private forecasts from the International Monetary Fund. In addition, borrowing at these levels gives the government little room to stimulate the economy before the next General Election in 2010 and remains a very important risk factor for Sterling.
The announcement yesterday triggered a sharp decline in the Pound and the deficit is certainly at a level that could spell a sustained downward pressure on the UK currency. Darling’s expectations that growth will resume at the end of the year is far too optimistic and suggests that taxes will ultimately rise again.
Paul Day, chief market analyst at MIG Investments SA in Singapore, said the “the UK is mortgaged up to the hilt. Sterling is way off its lows against many currencies…the risk is that we’ll take those lows out over the next couple of months.” Therefore, Euro and Dollar buyers may wish to take advantage of the current rate, as the downside pressures surrounding the Pound continue to pile up.
The UK currency slid earlier in the day after a separate report from the International Labour Organisation showed that the number of people out of work rose to 2.1 million in the last quarter, the most in 12-years. The unemployment rate increased to 6.7%, the highest since October 1997, from 6.5% in the quarter through January.
The report from the Office of National Statistics showed that claims for jobless benefits rose 73,700 in March to 1.46 million, which was significantly less than the 116,000 anticipated. Darling pledged help for the unemployed in the budget yesterday, as the recession forced companies to cut production and axe jobs.
EUR/USD
The Euro declined to lows below $1.2900 against the Dollar yesterday, but the U.S currency was unable take full advantage and failed to challenge significant technical levels. U.S stocks rallied, diminishing the allure of the Dollar as a haven, while house prices rose 0.7% in February to record the first consecutive gain in the U.S for two years.
The report provides some optimism that near-zero interest rates may be moderating the decline in property values. Prices fell 6.5% in February from a year earlier, the second smallest drop in six months. Mortgage rates have tumbled 1.6 percentage points in the past six months, making homes more affordable.
The tentative swings in risk sentiment are likely to continue in the short-term, as fears over non-performing loans in the consumer credit sector will see traders maintain a generally cautious attitude towards risk, curbing any prolonged Dollar selling. The focus today in terms of economic data will fall on the U.S jobless claims. Confidence in the prospects of an economy recovery will be sustained if there is a further decline in jobless claims and a rise in existing home sales.
GBP/USD GBP/EUR
Data Released 23rd April
U.K 11:00 CBI Industrial Orders (April)
EU 08:58 Flash PMI – Composite
– Manufacturing
– Services
EU 09:00 Current Account (February)
EU 10:00 Industrial Orders (February)
U.S 13:30 Initial Jobless Claims (w/e 18th April 2009)
U.S 15:00 Existing Home Sales (March)
written by Adam Solomon
