Sterling is the big loser overnight in the markets and it is on the ropes this morning again. Recently we have witnessed a consistent pattern of steady gains followed by a sharp sell off. The pound has retraced to 1.63 against the USD and 1.15 against the euro; the 1.15 level is a crucial support on GBP/EUR and a break below 1.15 will be worrying for the pound. So what is causing this renewed weakness for the pound?
Initially the rot was started with the confirmation that June’s public sector net borrowing came in at £13 billion, the figures were actually better than expected but still underlined the dire state of public finances and understandably focused attention as to how we can climb out of this debt? Cue feedback from the National Institute of Economic and Social Research (NIESR) which said that government finances will remain deeply in the red for at least 4 years and this is based on the Treasury tightening the crews on public spending to a higher degree than planned…so a tighter reign on spending and inevitable tax rises is on the menu beyond the next election- very appetizing. Sterling has suffered on this negativity as it does on any scent of bad news; a couple of articles also added to pressure on the pound- the first reported in the Financial Times highlighting a survey that more than half of businesses did not see any improvement in their prospects for at least another 12 months. The second through the Telegraph noted that Barclays and RBS will need billions more in capital if they are to continue growing their investment banks.
Ben Bernanke’s semi-annual testimony to congress affirmed that the Federal Reserve is in no hurry to tighten monetary policy due to the fragility of the US economy. He aimed to soothe those worried on inflation rising sharply by adding that the extraordinary policy measures would be withdrawn in a smooth and timely manner. So no exit strategy or focus on raising interest rates in the near term and the energy is still definitively on nurturing a sustained economic recovery. The USD firmed on the back of the cautious note by Bernanke.
In other news the Bank of Canada left interest rates on hold and provided a more upbeat tone than expected on the current health of the economy. It also softened its tone on the relative strength of the Canadian dollar but did note that the strength of the currency was a problem.
The Bank Of England minutes just released offered no surprises with a vote of 9-0 to keep rates on hold and to maintain QE levels at £125 billion. Slightly sterling supportive as the minutes noted a reduction in the downside risks on GDP.
Report by Phil McHugh
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