Political Hope Keeps Sterling Resilient. By Nicholas Hastings
Sterling continues to resist a strong political downdraft, possibly on hopes that all will come right in the end.
At the moment, the political outlook couldn't be worse.
Current opinion polls suggest that after general elections May 6, the country faces not just a hung parliament but one in which the Liberal Democrats will have much more power than had been previously envisaged.
Such a balance, which is likely to keep Labour Prime Minister Gordon Brown in Number 10, not only means a government much less inclined to tackle the country's budget deficit problems head on, but an administration that is much more likely to pursue tax-and-spend policies that could inflict further damage on the country's economic growth prospects.
Even before such an economic downside becomes apparent, the pound would also face the uncertainty of prolonged coalition negotiations, something to which the U.K. political system is totally unaccustomed.
As Simon Derrick, a senior currency strategist with Bank of New York Mellon, pointed out, on average it takes 40 days for a coalition government to be sorted in Europe. And most European countries are used to it.
Nevertheless, the pound continues to hang in there, trading well above $1.50 and showing little sign of retesting the lows it hit under $1.48 early last month.
See the pound's recent resilience against the dollar:
Its resilience certainly doesn't stem from any faith in the U.K. economy.
Signs of recovery are showing through but the upturn remains fragile and even with inflation data Tuesday proving to be much higher than expected, the Bank of England isn't expected to start hiking rates again until next year.
The year-on-year rise in consumer prices to 3.4% last month from 3.0% in February was largely dismissed as a result of higher oil and fuel prices and that a combination of high spare capacity and a tough labor market will ensure that inflation falls back below the central bank's 2.0% target by the end of the year.
Thus, from the looks of things, the only real engine for sterling is politics.
Last week's surprising debate between the three main party leaders has catapulted Nick Clegg, the hardly known leader of the Liberal Democrats, into a leading position. Latest polls suggest that his party could now command as many as 79 seats in the House of Commons, compared with Labour's 281 seats and the Conservatives with 257.
The last time the Labour Party needed the support of the Liberals was back in the late 1970s when they had just 13 members of parliament.
The prospect of such a parliament has certainly sent jitters through the investment community but there remains little indication of some wholesale withdrawal.
With just over two more weeks to go and two more televised debates--a first for the U.K.--before the election, there appears to still be some hope that support for the Liberal Democrats will fade as the realities of a hung parliament hit home.
If so, this could help the Conservative Party, which has pledged to reduce spending and cut the deficit more quickly than Labour or the Liberal Democrats, to pull ahead in the polls and eventually win a majority that gives it a free hand with policy.
For the pound, this should ensure continued support and mean that any heavy pre-election losses would probably be reversed.
Early Wednesday in Europe, the pound was finding some support, like most other high yielders, from improved sentiment over the global recovery.
Indications that both Australia and Canada will raise their rates soon, the fastest growth in Australia's leading economic indicator in 13 years, strong earnings from Apple and receding fears about the fraud charges against Goldman Sachs all contributed to a more relaxed mood in the international investment community.
However, with talks on Greece's debt problems getting underway in Athens later in the day, the euro is finding it difficult to attract support. Greek officials have suggested the talks could take at least 10 days.
By 0645 GMT, the pound had risen to $1.5398 from $1.5372 late Tuesday in New York, according to EBS.
The euro was down marginally at $1.3442 from $1.3445 but managed to rise to Y125.44 from Y125.23. The dollar was up at Y93.30 from Y93.15.
At the moment, the political outlook couldn't be worse.
Current opinion polls suggest that after general elections May 6, the country faces not just a hung parliament but one in which the Liberal Democrats will have much more power than had been previously envisaged.
Such a balance, which is likely to keep Labour Prime Minister Gordon Brown in Number 10, not only means a government much less inclined to tackle the country's budget deficit problems head on, but an administration that is much more likely to pursue tax-and-spend policies that could inflict further damage on the country's economic growth prospects.
Even before such an economic downside becomes apparent, the pound would also face the uncertainty of prolonged coalition negotiations, something to which the U.K. political system is totally unaccustomed.
As Simon Derrick, a senior currency strategist with Bank of New York Mellon, pointed out, on average it takes 40 days for a coalition government to be sorted in Europe. And most European countries are used to it.
Nevertheless, the pound continues to hang in there, trading well above $1.50 and showing little sign of retesting the lows it hit under $1.48 early last month.
See the pound's recent resilience against the dollar:
Its resilience certainly doesn't stem from any faith in the U.K. economy.
Signs of recovery are showing through but the upturn remains fragile and even with inflation data Tuesday proving to be much higher than expected, the Bank of England isn't expected to start hiking rates again until next year.
The year-on-year rise in consumer prices to 3.4% last month from 3.0% in February was largely dismissed as a result of higher oil and fuel prices and that a combination of high spare capacity and a tough labor market will ensure that inflation falls back below the central bank's 2.0% target by the end of the year.
Thus, from the looks of things, the only real engine for sterling is politics.
Last week's surprising debate between the three main party leaders has catapulted Nick Clegg, the hardly known leader of the Liberal Democrats, into a leading position. Latest polls suggest that his party could now command as many as 79 seats in the House of Commons, compared with Labour's 281 seats and the Conservatives with 257.
The last time the Labour Party needed the support of the Liberals was back in the late 1970s when they had just 13 members of parliament.
The prospect of such a parliament has certainly sent jitters through the investment community but there remains little indication of some wholesale withdrawal.
With just over two more weeks to go and two more televised debates--a first for the U.K.--before the election, there appears to still be some hope that support for the Liberal Democrats will fade as the realities of a hung parliament hit home.
If so, this could help the Conservative Party, which has pledged to reduce spending and cut the deficit more quickly than Labour or the Liberal Democrats, to pull ahead in the polls and eventually win a majority that gives it a free hand with policy.
For the pound, this should ensure continued support and mean that any heavy pre-election losses would probably be reversed.
Early Wednesday in Europe, the pound was finding some support, like most other high yielders, from improved sentiment over the global recovery.
Indications that both Australia and Canada will raise their rates soon, the fastest growth in Australia's leading economic indicator in 13 years, strong earnings from Apple and receding fears about the fraud charges against Goldman Sachs all contributed to a more relaxed mood in the international investment community.
However, with talks on Greece's debt problems getting underway in Athens later in the day, the euro is finding it difficult to attract support. Greek officials have suggested the talks could take at least 10 days.
By 0645 GMT, the pound had risen to $1.5398 from $1.5372 late Tuesday in New York, according to EBS.
The euro was down marginally at $1.3442 from $1.3445 but managed to rise to Y125.44 from Y125.23. The dollar was up at Y93.30 from Y93.15.
- 21 April |
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