GBPEUR/GBPUSD
The Pound declined significantly against the U.S Dollar yesterday, falling to a low of $1.6310 during Asian trading, as a report showed that the UK’s budget deficit climbed in June to the most for the month since comparable records began in 1993. The UK currency also lost ground against the Euro, falling towards 1.1500 in London, as the report stoked concerns that the government will struggle to find buyers for its assets.
The latest public sector borrowing data revealed that Britain had a £13 billion budget deficit in June, as the worst recession in a generation ravaged tax revenue and increased unemployment. The shortfall compared with £7.5 billion just a year earlier, as tax income fell 5.7%, while government spending increased 2.8%.
The scale of borrowing has ignited a political dispute with the Conservatives accusing the Prime Minister Gordon Brown of misleading voters by denying that deep spending cuts are inevitable after the next general election. The International Monetary Fund warned last week that Brown risks putting pressure on the Pound unless he commits to a “credible” plan to narrow the deficit once the recession is over.
Ruth Lea, an economist at Arbuthnot Banking Group Plc, said in an interview following the report that “these figures are just simply appalling. When there is a new government they have to do something pretty radical to retain the confidence of the markets. This country is in for a very tough time over the next three or four years.”
Despite these comments and escalating concerns over the UK’s debt position, The FTSE 100 Index rose for a seventh consecutive day, the longest stretch of gains in four years, as William Morrison Supermarkets Plc said that earnings will exceed forecasts and U.S companies posted better-than-expected results.
UK stocks rose another 0.9% in London to 4,481.17 and the measure has rallied for the past seven trading days, the longest stretch of gains since July 2005. The FTSE 100 has jumped 8.6% over the past week, as companies from Goldman Sachs to Johnson & Johnson reported profit that beat analysts’ estimates.
The resilience in risk appetite is somewhat surprising considering the degree of pessimism for the economic outlook but the Pound still plunged from the highest level this month against the Dollar. The budget shortfall was actually an improvement on the revised £18.6 billion for May and compared favourably with expectations of a £16 billion deficit.
The budget deficit is still heading towards 14% of gross domestic product in the current fiscal year and the Bank of England Deputy Governor Charles Bean still expects the second quarter growth to be negative. Markets will remain extremely sensitive to growth consideration, as any evidence that a recovery is stalling would reinforce debt concerns and increase downward pressure on Sterling.
Gilts also reversed earlier declines yesterday, after the Federal Reserve Chairman Ben Bernanke told Congress in his semi-annual testimony that policy makers will keep interest rates “exceptionally low”. Jeremy Stretch, a senior strategist at Rabobank International, said that “the question mark over public finances remain a short-term negative for Sterling. It’s hardly likely to boost sentiment.”
Stretch also identified so called support at $1.6395 versus the Dollar, as an area where buy orders for the currency may be clustered. However, the Pound plummeted through that level with alarming ease on Tuesday and looks poised for further downward moves ahead of the minutes from the Bank of England’s last policy meeting.
The Monetary Policy Committee minutes will be watched very closely this morning for any indication of the quantitative easing debate with Sterling vulnerable to any suggestion that bond buying will be increased beyond £125 billion in August. Euro and Dollar buyers are well positioned to consider the use of a stop order in the market and protect against a sustained downward move.
EUR/USD
The Dollar rebounded from a six-week low versus the Euro yesterday and also registered sharp gains against the majority of the 16-most actively traded currencies, amid concerns that CIT Group Inc may file for bankruptcy, renewing demand for the Dollar as a refuge. In his semi-annual testimony to Congress, the Fed Chairman Ben Bernanke stated that there were tentative signs of stabilisation in the economy and the that the pace of the decline appeared to have slowed significantly.
Bernanke also reiterated that the bank did have a credible exit strategy from the ultra-loose interest rate policy that has seen rates taken to a range between zero and 0.25%. His comments illustrate that the Fed is very sensitive to the issue of maintaining confidence in the U.S assets, particularly the Treasury market and the Dollar.
The Fed Chairman also stated that the Fed would maintain a highly accommodative monetary policy for an extended period and there is still very little chance of a near-term tightening given the cautious tone over the economy. Risk appetite faded to some extent following Bernanke’s comments, while there was also fresh speculation that CIT would file bankruptcy.
Data Released 22nd July
U.K 09:30 BoE Monetary Policy Committee Minutes of 8/9 July Meeting
EU 10:00 Industrial Orders (May)
U.K 11:00 CBI Industrial Orders (July)
written by Adam Solomon
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