by Adam Solomon
The Pound weakened against 15 out of the 16 most actively traded currencies yesterday, amid growing evidence that next week’s general election will produce a government without the parliamentary support needed to tackle the record budget deficit that is the biggest among the Group of Seven nations.
A daily ComRes Ltd opinion poll published on Monday showed that 32% of respondents backed the Conservatives, 31% favoured the Liberal Democrats, while just 28% supported Gordon Brown’s Labour Party. The survey is the latest in a long line of opinion polls to suggest that the May 6th election will produce the first Hung parliament since 1974.
Adam Cole, head of global currency strategy at Royal Bank of Canada, said that the “focus is on the opinion polls. If we continue to see this picture of the Tories leading, Lib Dems second and Labour third in the run-up to the election, that’s a negative backdrop for Sterling.” Due to the fundamental lack of any significant economic data, the Pound has been susceptible to volatility surrounding the latest opinion polls.
The UK currency declined 0.8% to trade under the pivotal resistance level at $1.5350 against the Dollar, while the Pound also traded down towards 1.15 versus the Euro, after rising to the highest level since January. The prospect of a political deadlock following the May 6th election has been the catalyst to a 5.2% decline in the Pound versus the Dollar this year.
The Pound erased an earlier decline against the Euro yesterday, after Standard & Poor’s Ratings Services cut Greece’s and Portugal’s credit ratings, prompting a sell off in bonds from indebted European nations, which sent stocks sharply lower. The UK currency has rallied 2.9% in the past month, as all three main leaders pledged to tackle the budget deficit if elected.
Business Secretary Peter Mandleson yesterday sought to reassure investors that a hung parliament would not lead to instability in the economy. He told reporters, “I think that the markets have pretty much discounted whatever the result. I think that they know that in our political system you will get sensible, stable, grown-up politics.”
Mandleson’s comments contradict George Osborne, the Conservatives’ Treasury spokesman, who yesterday predicted a hung Parliament could lead to a “dip in confidence,” a slump in the Pound and “disastrous” increases in interest rates that would “paralyse” the economy. The Pound also weakened against the Dollar, even after the British Bankers’ Association said yesterday that mortgage approvals rose in March.
Banks granted 34,905 home loans last month, compared with 33,360 in February. Jeremy Stretch, a senior currency strategist at Rabobank International, said that “sterling got close to the top of its range near $1.55 yesterday, and that’s always a propensity for a bit of a correction. Similarly, we got down close to 86 pence against the Euro. In both cases, there was always a bit of a correction risk.”
Due to the distinct lack of UK economic data released this week, the Pound may still be vulnerable should political uncertainty detract from action to bolster the economy and cut the deficit. Mike Turner, head of strategy at Aberdeen Asset Management Plc, said “the fear is you don’t get any clarity, immediately anyway, and it still hits Sterling.”
The budget deficit widened 76% in the year through March to £152.8 billion, the largest since the Second World War. In March, it was £23/5 billion, the most for any month since records began in 1993. On a slightly more positive note, the Confederation of British Industry said yesterday that an index of retail sales stayed positive in April, as expectations of sales rose to a five month high.
The Euro plunged below $1.32 against the Dollar for the first time since April 2009, after Standard & Poor’s lowered Greece’s debt to “junk” and cut the rating for Portugal. The Dollar and the Japanese Yen rallied versus the majority of the 16 most actively traded currencies, amid concern that European governments are struggling to contain the debt crisis.
The increase in risk aversion diminished traders appetite for the so-called high-yielding currencies, including the South African Rand and Australian Dollar, while the Euro fell by the most against the U.S currency since June 2009.
Richard Franulovich, a senior currency strategist at Westpac Banking Corp, said that “there’s been a pretty catastrophic breakdown in peripheral Europe. It’s just a matter of time before we break $1.30 and go to $1.25.” The Euro slipped 1.6% to $1.3175 at the close of trading last night, ahead of the Federal Reserve interest rate announcement today.
U.S 19:15 – FOMC Rate Announcement (April)
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