GBP supported by the budget
It is a indication of how though finances are when the Conservative party, the self titled party of ‘law and order’ is talking about cutting police numbers to save money. The austerity measures announced in the budget are going to be painful for almost everyone, and they’ve certainly displeased the US who in the G8 and G20 meetings have expressed their support for continuing stimulus measures (mostly in a bid to try and prop up their exports), but it has had the desired effect on the financial markets, and and ,unlike Greece, the chances of a general strike are pretty remote.
The contrast between the UK austerity measures, and the performance of European governments has seen Pound has perform exceptionally well against the Euro in the last few days, and as there was some soft demand for a Italian bond auction this week, plus the end of a €442bn ECB liquidity scheme this week, the Euro has come under some pressure, not only allowing the Pound to reach 1.23, but also slipping against the Dollar down to 1.2230 from 1.2370 yesterday.
Andrew Sentance has backed up his hawkish vote in the last MPC meeting with comments that the Pound is still ‘below some notion of equilibrium’, and that the need for fiscal tightening shouldn’t preclude the need to start raising interest rates now. This kind of hawkish talk has helped push the Pound higher against a broad range of currencies including the US and Australian Dollars. The GDP figures for the 2nd quarter of 2010 are expected to be relatively strong, but as the budget cuts start to hit Q3 might not be so good, and it will be how the budget affects the future growth rates which will provide the biggest test for the Pound.
The Pound’s rally may be limited by the uncertainty ahead of Friday’s US non-farm payrolls, and today’s data may also knock a little wind out of its sales as consumer credit in the UK is expected to show fairly flat growth in this morning’s releases. Consumer confidence in the US is expected to retreat slightly, and the EC business survey’s will be watched for any divergence between the ‘core’ and ‘peripheral’ Eurozone countries. We may see some pull back as traders take advantage of yesterday’s rally, which could weaken the Pound slightly, but it should be able to hold onto most of its gains.
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