The Pound Has Seen Its Best For Now. By Nicholas Hastings

A sterling rally back over $1.50?

Forget it.

Tuesday's emergency budget certainly played to the crowds as well as to the credit rating agencies, providing a universal cry that the U.K.'s new coalition government is doing the right thing.

Public spending is being slashed, taxes on consumer spending (value added tax) is being hiked and banks are facing new levies.

The immediate assumption is that the budget will boost confidence in U.K. PLC and the pound will rally.

But, this assumption won't last for long.

See how the pound has rallied so far:



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Fitch may have been the first out cheering the new chancellor, George Osborne, over his fiscal tightening. As the credit agency said, the budget sets out "an ambitious deficit reduction path."

There are two big question marks here, though.

Can Osborne deliver?

And, if he does deliver, can the economy take it?

Most of the public spending cuts won't be detailed until October and measures such as the VAT increase to 20% from 17.5% won't take effect until early next year.

In the meantime, economic growth may well accelerate as consumers prepare to tighten their belts. There has even been a call by one member of the Bank of England's monetary policy committee for interest rates to be hiked by 25 basis points.

The problems start once Osborne attempts to put the policies in place.

Not only is there a risk that the austerity program will split the finely balanced coalition of the Conservatives and the Liberal Democrats as well an unleash the ire of public sector unions, but there is a good chance that the U.K.'s economic growth, which has already been marked down to 2.3% from 2.6% next year, will fall far short of even the government's own expectations.

If so, any chances of monetary tightening will go straight through the window and investors are hardly likely to look favorably on sterling.

Brendan Brown, chief economist with Mitsubishi UFJ Securities International in London, painted the possible picture: "It is not hard to imagine an infernal combination in which U.K. economic stalling, budget deficit overruns, public sector strikes, squabbling within the coalition, and new monetary "stimulus" by the Bank of England, produce an almighty run on the pound."

The fact that the global economic recovery will probably be looking as weak as ever at this time means that's the last thing the U.K. authorities will want as they struggle to prevent a double-dip recession.

With all these hiccups ahead, only a brave man will want to chase the pound higher at this stage.

Early Thursday in Europe, the pound was finding some support, like most other currencies, against the dollar after the Federal Open Market Committee issued a slightly more dovish statement on the U.S. recovery, reducing expectations that U.S. interest rates will be hiked early next year.

By 0645 GMT, the pound was up at $1.4971 from $1.4951 late Wednesday in New York, according to EBS. However, sterling was still showing little sign of making a sustained break over $1.50.

The euro was up at $1.2327 from $1.2311 as well as at Y110.79 from Y110.60. The dollar was essentially flat at Y89.87.

The Australian dollar was also stable at $0.8738 from $0.8735 after Kevin Rudd resigned as prime minister and was replaced by his deputy, Julia Gillard.