Pound May Rise Against Euro But Not Vs Dollar. By Nicholas Hastings
Sterling is becoming the currency of two halves--still falling against the dollar but rising against the euro.
This performance will become even more distinct as the U.K. budget gets closer and David Cameron's new government convinces financial markets, as well as credit rating agencies, that it is serious about slashing the budget deficit.
The importance of keeping rating agencies happy and of preserving the country's AAA sovereign rating was apparent earlier this week when Fitch issued its warning that the U.K. faces a "formidable fiscal challenge."
There was nothing new in Fitch's statement but it was still enough to knock the pound lower.
It wasn't enough, however, to put investors off buying U.K. government bonds with gilt auctions this week proving successful and with gilt prices ending higher despite what Fitch had to say.
If anything, there is growing confidence in the U.K.'s debt position and in the new coalition government's determination to reduce spending by GBP80 billion and to cut some departmental budgets by as much as 20% when the new Chancellor of the Exchequer, George Osborne, unveils his plans on June 22.
The U.K.'s ability to deliver on its promises will contrast with developments in the euro zone, where individual governments have announced plans to reduce spending but where investors remain uncertain whether spending will actually be reduced in reality.
This has already been reflected in the continued rise in the price that many euro zone countries, including those that are seen as safe havens, are having to pay for funds.
Bond auctions by the Netherlands, Portugal, Austria and Spain this week, raised the funds these countries needed but at an additional cost.
Of course, growing debt problems in the euro zone are still a risk for the U.K. But, with Cameron more likely to achieve his budget goals than the European Union, the pound will remain a better bet than the euro.
However, it is just this likely U.K. success on the debt front that will make the pound less attractive against the dollar.
Spending cuts of that size pose a nasty risk to the economy, with many analysts suggesting that the Bank of England will have to resort to further quantitative easing after the budget to ensure that credit conditions don't deteriorate again and that the economy isn't pushed back into recession.
Certainly, U.K. interest rates are hardly likely to be raised from their recent record low levels any time in the foreseeable future and yield differentials will continue to work against sterling.
Across the Atlantic, meanwhile, the U.S. recovery may be fragile but, as Fed Chairman Ben Bernanke reminded us this week, growth is gaining traction.
Although a hike in U.S. interest rates isn't around the corner, Fed monetary tightening is now only months away, ensuring that the dollar's yield premium to the pound will only grow.
So while the euro will probably soon dive under the GBP0.8200 support level that has held so far this month, the pound will probably sink against the dollar. Forecasters at ING Financial Markets are looking for it to reach $1.34 in the next four months.
See the euro's recent slide against the pound:
Click Image to Enlarge
An improvement in global market sentiment helped the pound rise against the dollar early Friday in Europe, reaching $1.4732 by 0645 GMT from $1.4708 late Thursday in New York, according to EBS.
The euro was down at GBP0.8219 from GBP0.8253 even though it had risen to $1.2107 from $1.2138.
The single currency was down at Y110.73 from Y110.84 while the dollar rose to Y91.44 from Y91.30 as the positive market mood appeared to be running out of steam.
China remained very much center stage after more strong economic data, including a sharp rise in consumer prices which raised the possibility of overheating.
U.S. reaction to the country's strong export data Thursday also means that there will be increased pressure for a yuan revaluation.
This performance will become even more distinct as the U.K. budget gets closer and David Cameron's new government convinces financial markets, as well as credit rating agencies, that it is serious about slashing the budget deficit.
The importance of keeping rating agencies happy and of preserving the country's AAA sovereign rating was apparent earlier this week when Fitch issued its warning that the U.K. faces a "formidable fiscal challenge."
There was nothing new in Fitch's statement but it was still enough to knock the pound lower.
It wasn't enough, however, to put investors off buying U.K. government bonds with gilt auctions this week proving successful and with gilt prices ending higher despite what Fitch had to say.
If anything, there is growing confidence in the U.K.'s debt position and in the new coalition government's determination to reduce spending by GBP80 billion and to cut some departmental budgets by as much as 20% when the new Chancellor of the Exchequer, George Osborne, unveils his plans on June 22.
The U.K.'s ability to deliver on its promises will contrast with developments in the euro zone, where individual governments have announced plans to reduce spending but where investors remain uncertain whether spending will actually be reduced in reality.
This has already been reflected in the continued rise in the price that many euro zone countries, including those that are seen as safe havens, are having to pay for funds.
Bond auctions by the Netherlands, Portugal, Austria and Spain this week, raised the funds these countries needed but at an additional cost.
Of course, growing debt problems in the euro zone are still a risk for the U.K. But, with Cameron more likely to achieve his budget goals than the European Union, the pound will remain a better bet than the euro.
However, it is just this likely U.K. success on the debt front that will make the pound less attractive against the dollar.
Spending cuts of that size pose a nasty risk to the economy, with many analysts suggesting that the Bank of England will have to resort to further quantitative easing after the budget to ensure that credit conditions don't deteriorate again and that the economy isn't pushed back into recession.
Certainly, U.K. interest rates are hardly likely to be raised from their recent record low levels any time in the foreseeable future and yield differentials will continue to work against sterling.
Across the Atlantic, meanwhile, the U.S. recovery may be fragile but, as Fed Chairman Ben Bernanke reminded us this week, growth is gaining traction.
Although a hike in U.S. interest rates isn't around the corner, Fed monetary tightening is now only months away, ensuring that the dollar's yield premium to the pound will only grow.
So while the euro will probably soon dive under the GBP0.8200 support level that has held so far this month, the pound will probably sink against the dollar. Forecasters at ING Financial Markets are looking for it to reach $1.34 in the next four months.
See the euro's recent slide against the pound:
Click Image to Enlarge
An improvement in global market sentiment helped the pound rise against the dollar early Friday in Europe, reaching $1.4732 by 0645 GMT from $1.4708 late Thursday in New York, according to EBS.
The euro was down at GBP0.8219 from GBP0.8253 even though it had risen to $1.2107 from $1.2138.
The single currency was down at Y110.73 from Y110.84 while the dollar rose to Y91.44 from Y91.30 as the positive market mood appeared to be running out of steam.
China remained very much center stage after more strong economic data, including a sharp rise in consumer prices which raised the possibility of overheating.
U.S. reaction to the country's strong export data Thursday also means that there will be increased pressure for a yuan revaluation.
- 11 June |
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