Still No Reason To Buy The Pound Now. By Nicholas Hastings
Sterling players should resist being lulled into a false sense of security.
The pound may be bouncing a little in the wake of an apparent agreement by the euro zone and the International Monetary Fund late Thursday to help Greece if needed, but this bounce may not last long.
Minimal reaction by financial markets to this week's U.K. budget, a sharp rebound in retail sales and even a further increase in speculative positions against the British currency all suggest that the pound may not break back under its low for the year at $1.4785.
This will all change, though.
On the domestic front, political uncertainty and the continued threat of a hung Parliament are likely to return once the government gets around to calling the general election that has to take place by early June.
On the international front, the issue of the U.K.'s budget deficit will also leap up the currency agenda, especially if the euro zone remains incapable of resolving its debt crisis.
A warning from China this week that Greece is just the "tip of the iceberg" of sovereign debt problems is only likely to further unnerve investors about countries such as the U.K., where curbing rising budget deficits may not be so easy.
If the euro zone is facing such difficulties, how will the U.K. tackle the task, especially if it is being run by a government with no clear majority?
But, back to the budget.
As expected, Chancellor Alistair Darling's policy changes were largely fashioned by the upcoming election. By trimming his forecasts for the budget deficit and shaving a little off his growth predictions, the chancellor attempted to gain some credibility and ensure that his budget didn't trigger a rush on sterling assets.
Few, however, were convinced by Darling's promises of economic prosperity and failure to recognize the risks of a double-dip recession.
Even data Thursday showing a strong rebound in retail sales last month failed to make forecasters any more optimistic, given that the 2.1% rise in February failed to reverse the nasty 3.0% fall in January, when snowstorms kept shoppers at home.
If anything, high unemployment, low earnings growth, elevated debt levels, January's rise in VAT and basic worries about how any future government will tackle deficit means that U.K. growth is likely to fall back again in the first quarter of this year after showing a small improvement at the end of last year.
Given that, the chances of any early tightening in U.K. rates is even more remote, and there remains the chance of the Bank of England increasing quantitative easing just to ensure that any dip back into recession doesn't last long.
Looking at Darling's attempts to fix the figures, Brian Coulton, the head of Fitch's sovereign ratings in Europe, said that the deficit revisions inch in the right direction.
But, he added, "this projected path leaves the public finances vulnerable to shock, particularly in the presence of large uncertainties over the U.K. economy's medium-term prospects."
Of course, there is then the election. Whether the budget has increased the government's standing in the polls remains to be seen, and with the Conservatives still commanding only a small 6-point lead, the risks of a hung Parliament, in which deficit reduction policies will be hard to pursue, remain as high and as unpalatable for the pound as ever.
Sovereign debt is also rising as a key issue on the agenda for international investors. The problems Greece has faced is one thing. But with the euro zone proving incapable of resolving the issue quickly and on its own, fears of debt problems erupting elsewhere are starting to spread.
Portugal is already in the markets' sight lines and now Zhu Min, the deputy governor of the Peoples' Bank of China, warned that this is just the start of a much larger sovereign debt problem.
Once this impression takes hold and the U.K. finds its credit rating under threat, pressure on the pound will increase again--more than likely taking it down to many more new lows for 2010.
Early Friday in Europe, the pound is up at $1.4846 at 0805 GMT, from $1.4818 late on Thursday in New York, according to EBS. The little bounce came as market sentiment in general improved on hopes that a final agreement on resolving Greece's debt problems has been reached.
The euro rallied to $1.3340 from $1.3282 and to Y123.61 from Y123.13 while the dollar slipped a little to Y92.64 from Y92.70.
The pound may be bouncing a little in the wake of an apparent agreement by the euro zone and the International Monetary Fund late Thursday to help Greece if needed, but this bounce may not last long.
Minimal reaction by financial markets to this week's U.K. budget, a sharp rebound in retail sales and even a further increase in speculative positions against the British currency all suggest that the pound may not break back under its low for the year at $1.4785.
See the pound's recent slide:
This will all change, though.
On the domestic front, political uncertainty and the continued threat of a hung Parliament are likely to return once the government gets around to calling the general election that has to take place by early June.
On the international front, the issue of the U.K.'s budget deficit will also leap up the currency agenda, especially if the euro zone remains incapable of resolving its debt crisis.
A warning from China this week that Greece is just the "tip of the iceberg" of sovereign debt problems is only likely to further unnerve investors about countries such as the U.K., where curbing rising budget deficits may not be so easy.
If the euro zone is facing such difficulties, how will the U.K. tackle the task, especially if it is being run by a government with no clear majority?
But, back to the budget.
As expected, Chancellor Alistair Darling's policy changes were largely fashioned by the upcoming election. By trimming his forecasts for the budget deficit and shaving a little off his growth predictions, the chancellor attempted to gain some credibility and ensure that his budget didn't trigger a rush on sterling assets.
Few, however, were convinced by Darling's promises of economic prosperity and failure to recognize the risks of a double-dip recession.
Even data Thursday showing a strong rebound in retail sales last month failed to make forecasters any more optimistic, given that the 2.1% rise in February failed to reverse the nasty 3.0% fall in January, when snowstorms kept shoppers at home.
If anything, high unemployment, low earnings growth, elevated debt levels, January's rise in VAT and basic worries about how any future government will tackle deficit means that U.K. growth is likely to fall back again in the first quarter of this year after showing a small improvement at the end of last year.
Given that, the chances of any early tightening in U.K. rates is even more remote, and there remains the chance of the Bank of England increasing quantitative easing just to ensure that any dip back into recession doesn't last long.
Looking at Darling's attempts to fix the figures, Brian Coulton, the head of Fitch's sovereign ratings in Europe, said that the deficit revisions inch in the right direction.
But, he added, "this projected path leaves the public finances vulnerable to shock, particularly in the presence of large uncertainties over the U.K. economy's medium-term prospects."
Of course, there is then the election. Whether the budget has increased the government's standing in the polls remains to be seen, and with the Conservatives still commanding only a small 6-point lead, the risks of a hung Parliament, in which deficit reduction policies will be hard to pursue, remain as high and as unpalatable for the pound as ever.
Sovereign debt is also rising as a key issue on the agenda for international investors. The problems Greece has faced is one thing. But with the euro zone proving incapable of resolving the issue quickly and on its own, fears of debt problems erupting elsewhere are starting to spread.
Portugal is already in the markets' sight lines and now Zhu Min, the deputy governor of the Peoples' Bank of China, warned that this is just the start of a much larger sovereign debt problem.
Once this impression takes hold and the U.K. finds its credit rating under threat, pressure on the pound will increase again--more than likely taking it down to many more new lows for 2010.
Early Friday in Europe, the pound is up at $1.4846 at 0805 GMT, from $1.4818 late on Thursday in New York, according to EBS. The little bounce came as market sentiment in general improved on hopes that a final agreement on resolving Greece's debt problems has been reached.
The euro rallied to $1.3340 from $1.3282 and to Y123.61 from Y123.13 while the dollar slipped a little to Y92.64 from Y92.70.
- 26 March |
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