GBP weakens against EUR with EU rate rise
It was only a couple of weeks ago that the morning note was reporting the biggest squeeze on people’s incomes since 1981. It now appears that this dire figure may have been overly optimistic, with the Centre for Economics and Business Research reporting at the weekend that household disposable income will fall this year at it fastest rate since 1921.
It doesn’t take a financial expert to work out that with less money in people’s pockets, weak consumer spending is something that our hard pressed high street will have to contend with for the foreseeable future. With the UK economy heavily reliant on the service sector to drive growth the outlook for the economy remains ‘bumpy’. As many of you will have heard over the past few months, the Chancellor has stated that the austerity measures will not change and “we must remain on this course”. Although I am pretty certain the Chancellor believes in his own rhetoric, it appears there is a Plan B if this all ends up going horrible wrong.
Over the weekend there were reports that the Treasury had prepared plans to slow down spending cuts if the recovery began to fail. Although the report lacked any detail it would appear that cuts to capital spending programmes would be eased to support the economy if and when needed. With the mixed economic news over the past few months it is certainly not something that can be ruled out.
Spending cuts were also on the agenda in Europe over the weekend as Portugal negotiates the term of its bailouts. To be fair it is not so much of a negotiation as Portugal needs the money and will have to abide by the terms the EU sets, which are likely to include spending cuts, tax rises and privatisations. However, with the Portuguese Prime Minister resigning two weeks ago after failing to gain support for further austerity measures, trying to reach agreement may still prove difficult.
In overnight trading the euro shrugged off any concerns over Portugal with GBP/EUR trading at 1.1290. The ECB decision to raise interest rates in Europe last week, with prospect of further hikes to come, has added support for the Euro. Against the dollar, the pound was trading at 1.6313, slightly off the highs of 1.6420 last week.