Sterling Set To Face Demons. By Katie Martin
The fun starts here for sterling, as the clock ticks down towards the UK's emergency budget next Tuesday.
This is the time when we start getting leaks about what new Chancellor of the Exchequer George Osborne is about to reveal. The weekend press will no doubt be full of them.
It's a big deal for the pound, for sure. The currency is highly sensitive to concerns that the U.K. might lose its cherished AAA debt rating--a grim prospect that would shove up its borrowing costs and could, in the worst-case scenario, prompt a Greek-style run on its bonds.
If Osborne shies away from making tough cuts, then the ratings agency pointy-heads will get their red pens out and the currency will fall. If he's too tough, the markets will grow nervous about a double-dip recession, and the currency will fall. Osborne needs to find a sweet spot in between the two.
Chances are, he'll do fine. His Conservative Party is committed to keeping the U.K.'s top-notch debt rating, and the recent reminder from Fitch that cuts need to be ambitious, has given him extra ammunition to shout down any doubters.
So maybe the big risk that traders need to prepare for is a rally in sterling next week.
It's a long shot, granted, as the U.K.'s public finances are in a mess, and will remain in one for some time. It may also take the ratings agencies a few days to peruse the budget and come up with a firm conclusion, so uncertainty could prevail for a while. In addition, the merest whiff of general investor nerves is enough to push the pound down from time to time in a broad risk-off move.
The worst possible situation is that Spain provides a last-minute sovereign-debt shock just before the U.K. budget, grating nerves and hitting investor sentiment, and then Osborne blows it.
But that's an unlikely scenario. And, crucially, the pound is cheap at the moment. Even analysts who loathe the currency, and expect it to fall heavily against the dollar in the coming months, admit that at $1.48 or so, sterling is at the bottom end of its recent range against the dollar. It's 2% below its level from the start of last month, nearly 10% below its strongest point of the year in January, and 12% below its highest point of last year.
Similarly, the euro--hardly the world's favorite major currency right now--is well above its long-term averages against the pound.
Sterling fans, and yes, some do exist, insist that the currency has already had its crisis. It would take something really nasty to push it down in a meaningful way. A budget from a Chancellor totally committed to putting public finances back on track and keeping the ratings agencies on side may not be the trigger for a selloff that many fear.
In early European trading Friday, the euro was trading at $1.2387 against the dollar, equal to its level late in New York Thursday, according to trading system EBS. The dollar was a shade weaker against the yen, at Y90.80 from Y91.00, and the euro was at Y112.40 from Y112.72. The pound was a little changed at $1.4827 from $1.4820.
The ICE Dollar Index, which tracks the dollar against a trade-weighted basket of other major currencies, was at 85.685 from 85.657.
This is the time when we start getting leaks about what new Chancellor of the Exchequer George Osborne is about to reveal. The weekend press will no doubt be full of them.
It's a big deal for the pound, for sure. The currency is highly sensitive to concerns that the U.K. might lose its cherished AAA debt rating--a grim prospect that would shove up its borrowing costs and could, in the worst-case scenario, prompt a Greek-style run on its bonds.
If Osborne shies away from making tough cuts, then the ratings agency pointy-heads will get their red pens out and the currency will fall. If he's too tough, the markets will grow nervous about a double-dip recession, and the currency will fall. Osborne needs to find a sweet spot in between the two.
Chances are, he'll do fine. His Conservative Party is committed to keeping the U.K.'s top-notch debt rating, and the recent reminder from Fitch that cuts need to be ambitious, has given him extra ammunition to shout down any doubters.
So maybe the big risk that traders need to prepare for is a rally in sterling next week.
It's a long shot, granted, as the U.K.'s public finances are in a mess, and will remain in one for some time. It may also take the ratings agencies a few days to peruse the budget and come up with a firm conclusion, so uncertainty could prevail for a while. In addition, the merest whiff of general investor nerves is enough to push the pound down from time to time in a broad risk-off move.
The worst possible situation is that Spain provides a last-minute sovereign-debt shock just before the U.K. budget, grating nerves and hitting investor sentiment, and then Osborne blows it.
But that's an unlikely scenario. And, crucially, the pound is cheap at the moment. Even analysts who loathe the currency, and expect it to fall heavily against the dollar in the coming months, admit that at $1.48 or so, sterling is at the bottom end of its recent range against the dollar. It's 2% below its level from the start of last month, nearly 10% below its strongest point of the year in January, and 12% below its highest point of last year.
Similarly, the euro--hardly the world's favorite major currency right now--is well above its long-term averages against the pound.
Sterling fans, and yes, some do exist, insist that the currency has already had its crisis. It would take something really nasty to push it down in a meaningful way. A budget from a Chancellor totally committed to putting public finances back on track and keeping the ratings agencies on side may not be the trigger for a selloff that many fear.
In early European trading Friday, the euro was trading at $1.2387 against the dollar, equal to its level late in New York Thursday, according to trading system EBS. The dollar was a shade weaker against the yen, at Y90.80 from Y91.00, and the euro was at Y112.40 from Y112.72. The pound was a little changed at $1.4827 from $1.4820.
The ICE Dollar Index, which tracks the dollar against a trade-weighted basket of other major currencies, was at 85.685 from 85.657.
- 18 June |
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