by Adam Solomon
The Pound rallied strongly against the U.S Dollar for the first time in three days and the UK currency also recovered earlier losses versus the Euro, as investors speculated that Britain will be able to rein in its budget deficit even if voters fail to elect a government with a majority in parliament. Sterling also gained the most against the Japanese Yen, ahead of the final live televised debate last night.
An opinion poll in the Sun newspaper the Conservatives had 34% of support, the Liberal Democrats on 31% and the ruling Labour Party with just 27%, indicating that a smaller Lib Dems might hold the balance of power after the May 6th vote.
Ian Spreadbury, manager of Fidelity International’s Strategic Bond Fund, said “in the event of a hung parliament, which is now looking quite likely, we would have some form of power sharing involving the Liberal Democrats. Their attitude to tackling the deficit is quite robust and so I don’t think it would be a disaster for the markets.”
The Pound rose 0.6% to $1.5301, after falling to the lowest level since April 8th and a break above $1.5350 would indicate that further gains are likely. The UK currency also advanced 0.4% versus the Euro, recovering back above 1.15 before the close of trading last night.
The instant reaction opinion polls showed that the Conservative leader David Cameron won the final debate of the UK election campaign, gaining momentum in his bid to oust Gordon Brown. Cameron’s central message in the 90-minute debate in Birmingham was that 13-years of Labour rule had left Britain with the highest unemployment rate in 16-years and an economy struggling to recover from the worst recession on record.
The Pound rose 0.4% against the Dollar in the minutes that followed the debate, amid renewed optimism that Cameron’s performance increased the slim prospect of a majority win next week. Concern that Britain will struggle to narrow the budget deficit, amid a period of very aneamic growth has contributed to the Pound’s 5.5% decline against the Dollar this year.
The ratings agency Standard & Poor’s has reduced its ratings on Greece, Portugal and Spain this week, increasing the debate among UK politicians on how to cut spending. David Cameron said in the build-up to last night’s debate that “Greece stands as a warning” to indebted countries.
Paul robson, a senior foreign exchange strategist at Royal Bank of Scotland Group Plc, said that “investors are reassessing sterling’s recent weakness. The fact that Greece is getting into more problems is a greater reason to believe that the UK will do the right thing on the budget deficit.”
Investors believe that a Conservative majority would be preferable for the bond market because they have a more aggressive plan for cutting the deficit. The Prime Minister Gordon Brown argues that reducing government spending too quickly would harm the economic recovery and prompt a “double-dip recession.”
The Pound also gained support yesterday, after the Nationwide Building Society said that UK house prices rose by twice as much as initial forecasts in April, as the property shortage continued. The average cost of a home rose 1% from March to £167,802 and prices are up 10.5% from a year earlier.
The Euro rose for a near one-year low against the U.S Dollar yesterday, as Greece’s Prime Minister George Papandreou tried to persuade labour unions to accept austerity measures, while German unemployment fell. Joe Manimbo, a market analyst at Travelex Global Business Payments, said that “the euro is stronger on hopes that officials in Europe will offer Greece financial support.”
Despite concern surrounding the debt levels in some peripheral member nations, European confidence in the economic outlook improved to the highest level in more than two years. An index of executive and consumer sentiment rose to a reading of 100.6 in April, from a revised 97.9 in March, exceeding initial forecasts.
Accelerating global economic growth is bolstering confidence and boosting sales at European companies. However, Greece’s budget crisis is already threatening to curtail momentum in the recovery and the Euro’s tentitative gain against the Dollar yesterday may not last, even as global sentiment improves.
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