It’s taken five days but we finally have a government and although the Labour party tried an 11th hour comeback, like a hand poking up through the soil from the grave, the markets favourite solution for the government, a Liberal/Conservative coalition, is now a done deal. The make up of the cabinet is still to be decided, but as Gordon Brown resigned, for the 2nd time in two days, the Pound put in a strong rally, jumping almost 2c against the Dollar, reaching up towards 1.50, although it has fallen back a little from this level as the Euphoria over the Euro bailout has started to fade, bringing down risk appetite . As the details start to get ironed out and we start to get some concrete proposals as to how they plan to reduce the deficit, we may get some political fallout as public workers see their salaries frozen and some will lose their jobs, but the Pound will benefit, especially as the markets turn their attention to the better than expected data which has come out while they have been distracted by the election.
The agreement of a UK government has given the Pound a good night, and it has driven even further up against the Euro as the initial optimism has waned somewhat. The Markets put in a strong rally on Monday after the announcement of the plan, however the scale of the problem has started to sink in and comments from European ministers that the bailout is just an interim measure, designed to cover the deficits while the harsh austerity measures are the long term solution. There was also some comments that the IMF part of the bailout was ‘hypothetical’, and stock markets have dipped back slightly, although the Pound has managed to take some benefit from the waning Euphoria, pushing up above 1.18 overnight.
In contrast to the problems in the Eurozone, the Chinese economy is still booming, with the latest industrial figures showing 18% yoy annual growth, although there is also some signs of Chinese inflation picking up. The underlying global economic picture is still picking up, and although the recent Eurozone problems have distracted from this, once it settles down (if it settles down) then the previous trend of recovering markets should resume which will be good news for the Pound.
The first data release new government faces is unemployment, this has been relatively benign over the past few months, mostly as the recession led to more casual labour and fewer hour worked rather than actual job losses. Elsewhere we have Eurozone GDP figures which may show a return to growth for the region, although some of the individual nations have already posted some anaemic figures. The Pound looks to be on the front foot today as the new government give the markets something to have confidence in.