GBP will cannot help itself
The UK’s current fiscal year continued its disappointing run as the Public Sector Net Borrowing Requirement widened to £17.9bn in May, up £2.7bn on a year ago. The higher deficit was driven by a fall in income tax receipts and a rise in social benefits payments suggesting weakness in the labour market.
At yesterday’s Treasury Select Committee hearing the BoE Governor, Sir Mervyn King, said that he is prepared to do more asset purchases if needed to stimulate the UK economy. He added that the MPC still think Quantitative Easing can have a positive impact which reinforces market expectations that they will undertake a further £50bn at next week’s meeting.
The further QE will cause GBP to weaken although a). Some degree of QE in the coming months has already been priced in and b). Other currencies, particularly EUR, are weakening faster. As such the nominal change in GBP versus EUR and USD may well be quite slim but versus AUD and NZD we could well see GBP fall.
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