by Adam Solomon
The Pound declined 0.6% against the Dollar yesterday to $1.5168, while the UK currency dipped to lows around 1.1450 versus the Euro, after former Bank of England policy maker Timothy Besley said that the UK economy remained in a “fragile state” and inflation is likely to stay under control through the remainder of the year.
Besley said that “until we’ve seen a run of data that support the idea that we’re on a road to recovery, we have to still mark down the economy as in somewhat a fragile state.” Britain’s three main political parties have committed to cutting the fiscal debt levels in the UK without outlining exactly how they plan to rein in the budget deficit.
The gap, which at more than 11% of gross domestic product is the largest in the Group of Seven nations, has dominated the election campaign and will be the primary topic of discussion in the final live televised debate this evening. The deficit has jumped 76% in the year through March to £152.8 billion, the most since the Second World War. It was £23.5 billion in March, the biggest for any month since records began in 1993.
Ian Stannard, a foreign exchange strategist at BNP Paribas SA, said “sterling will probably remain under pressure and weaken further against the Dollar. We have to be prepared for sterling heading back down to the March lows around the $1.4785 area over the coming week.”
Sterling weakened against 14 out of the 16 most actively traded currencies, after Besley said that further evidence is needed to show that the recovery is taking hold. His comments may indicate that the Central Bank’s monetary policy committee have no intention of raising UK interest rates from a record low of 0.5%, despite rising inflationary pressures becoming entrenched in the broader economy.
The anemic pace of economic growth means that price pressure within the economy will probably subside in the second half of the year. The preliminary first quarter growth figures showed that the economy expanded just 0.2% in the first three months of the year, half the pace of the recovery in the fourth quarter of 2009.
The political uncertainty and concern over a “double-dip recession” has seen the Pound decline 5.8% versus the Dollar in the past three months and the UK currency is the only currency to depreciate against the Euro in that period, amid intense speculation that the May 6th general election will produce a government too weak to tackle the ever-widening budget deficit.
Stuart Bennett, a senior foreign exchange strategist at Credit Agricole Corporate and Investment Bank, said that “we’re in an ongoing period of sterling negativity. This is linked to last week’s GDP numbers and lingering political uncertainty.” The Pound has fallen to the lowest level since April 8th against the Dollar this week and further losses are likely, after the UK currency plunged below the pivotal support at 1.5350.
The UK sovereign credit rating will be an important market focus in the short-term and there will certainly be further speculation that the AAA rating will be lost over the coming months. The ratings agencies, however, are likely to wait for early developments in the next parliament and will also be very reluctant to make any change during an election campaign.
To that end, the rating should be secure for the time being, but any move to downgrade would have a substantial negative impact on the Pound and confidence is liable to be fragile, especially after the Spanish downgrade yesterday. Despite a relatively positive Nationwide house price survey, the Pound has retreated back to lows around $1.5150 against the Dollar this morning.
The Euro plummeted to the lowest level in a year against the Dollar yesterday, after the rating agency Standard & Poor’s cut the debt rating of Spain in a sign that Europe’s deficit crisis is spreading to other member nations. The single currency fluctuated as Germany’s Chancellor Angela Merkel pledged in Berlin to step up efforts to overcome the Greece fiscal crisis.
Boris Schlossberg, director of currency research at online currency trader GFT Forex in New York, said that “the European fiscal authorities have let the situation get out of hand, and there’s a wholesale loss of confidence by investors. The dominoes are falling one by one.” There was even concern last night over the long-term existence of the Euro, as investors assessed the problems in a number of peripheral member nations.
The U.S Federal Reserve held interest rates unchanged between a range of zero to 0.25% and policy makers maintained the same tone and language in the accompanying statement. The Fed said that interest rates will remain at exceptionally low levels for an extended period. A withdrawal of that statement would indicate that policy makers are willing to raise interest rates.
U.K 07:00 – Nationwide House Prices (April)
GER 09:00 – Unemployment (April)
EU 09:00 – M3 (March) – 3 Month Moving Average
EU 10:00 – Business Climate (April)
EU 10:00 – Economic Sentiment (April) – Consumer / Industrial / Services
U.S 13:30 – Initial Jobless Claims (w/e 24th April)
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