George Osbourne’s speech didn’t announce any immediate cuts, and was instead used to announce measures that had already been promised such as the timing of the emergency budget and the creation of a independent forecasting body, in an attempt to do something similar to Labour’s creation of the independent MPC. Osbourne didn’t miss the chance to put the boot in to the outgoing government claiming that they led a ’scorched earth policy’ of irresponsible spending before the election, promising marginal constituencies new schools etc, as well as accusing them of using disingenuously optimistic forecasts to make their spending plans seem feasible. As the new Treasury officials talked down the UK’s fiscal position the Pound hit it’s lowest level against the Dollar since the Lehman brothers collapse, but it has rallied since then pushing up to 1.45 as the market pulls back from further risk aversion.
Another day another worry over Eurozone sovereign debt issues, with the spread over German bonds once again widening for Greek debt, it seems that even the large bail out package agreed last week has only given the markets temporary succour. The language from German officials about the stability of the EU may have been intended to scare their domestic audience, but the general tone of the talk about the future of the EU has followed the same lines. There is now speculation that the EU will not continue in it’s current form, and doubts about the role of the Euro as a reserve currency has led Russia to start to diversify away from the single currency, while the number of deals shorting the Euro (essentially selling the single currency, with the expectation of buying it back at a lower price in the future) stand at record levels. However from the nadir of yesterday the Euro has pulled back up above 1.24 against the Dollar this morning, and the Pound has slipped below 1.17 against the single currency, due to the ECB announcing how they are going to cover (sterilise) their purchase of government bonds, which has lessened some of the fears that they may be about to embark on a QE program.
One currency the Pound has been making some headway against, albeit limited and from a very low base, is the Australian Dollar, against which the Pound has pushed back up above 1.65, from a low below 1.63 at the end of last week. The AUD has been weakened slightly by a decrease in the forecasts for interest rate rises, as well as a slight downgrade to expectations for global growth, with the Eurozone spending cuts likely to weigh on import demand. The Australian Central Bank previously seemed to be on a pretty aggressive course of rate rises, and if these expectations continue to be set back and delayed then the AUD will continue to soften, although at 1.65 the Pound is still pretty close to historic lows against the Antipodean currency,
Today’s inflation figures have come in much higher than expected, with a reading of 3.7% and a forecast of 3.5%, meaning that Mervyn King gets to write a letter to the new Chancellor welcoming him to his new role and trying to explain away why inflation remains high. As you can see, even if CPI came in at the forecast figure, it would still be above target, but the fact that it is higher still puts a little pressure on the BoE, who have predicted that the rate will come down in the medium term due to the spare capacity in the economy
. We have Eurozone inflation data out later today, which will be a little more tame than the UK figure coming in at around 1.5%, although expect that figure to rise drastically if the ECB do embark upon any form of QE in the coming months.
The inflation figure seems to have put a dent in the Pound, and it has dropped half a cent against both the Dollar and the Euro, to sit around 1.4450, and 1.1650 respectively.