Wednesday, 22 July 2009

Wednesday, 22 July 2009

Sterling falling against the Euro

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 1.15 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’ 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.
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.
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