Pound faces defecit challenge
There was a mild thawing of the general mood of risk aversion yesterday, which has given stock markets in the US and Asia a boost, along with the commodities markets and the Australian dollar. The thawing was started by some supportive words of Bernanke’s who has discounted the idea of a double dip recession in the US, as well as backing Europe to sort out it’s debt problems. There was also good news from emerging markets with Brazil reporting a strong 9% yoy GDP growth, which has given the S&P500 a 1.1% lift, weakened the usual safe have currencies, the Dollar and the Yen, as well as given the AUD a little bit of a lift helping it push the Pound down to 1.75 this morning.
Normally when risk appetite has increased lately the Pound has benefited, but that was not the case yesterday as comments from the rating agency Fitch weighed on Sterling. The Pound had rallied on Monday after a speech by the Primeminister who warned how much the government will have to cut (as well as attempting to share the responsibility for what is cut, around as many people as possible), however it seems that similar comments for the rating agency have caused a few market jitters. Fitch has said that the UK faces ‘formidable’ challenges and needs a more ambitious plan to cut the deficit, and these comments dragged the Pound down to 1.4350 against the Dollar, and towards 1.2050 against the Euro. Listening to a representative of Fitch on the radio this morning, the statement was intending to say that there needed to be a more ambitious plan for the deficit compared to the last budget in April, something which is already clearly going to happen on the 22nd of June and beyond. The Pound has recovered a little from the lows of yesterday, pushing up towards 1.4450 against the Dollar, and 1.21 against the Euro.
The Euro also failed to make any headway from the fall in risk aversion, in fact European stocks actually fell a little yesterday, partly on the back of a strike by Spanish public workers, proving how hard it’s going to be for the European governments to take the public along with them, and partly on the back of the progression of a Europe wide tax on the banking system, which has weighed on financial stock particularly. It may take quite some time for the Euro to feel any benefit from the cost cutting exercises, and as it is exposed to problems not only the countries in the Eurozone, (but as the recent worries from Hungary show), also to nations with ties to the Eurozone, the volatility is likely to continue for some time.
It’s another relatively quiet day on the economic data front, although we have had the UK trade balance figures which have slightly widened, with the ash cloud interrupting business. the numbers have made little difference to the Pound which has stayed well supported this morning. Later in the day we get the Fed’s Beige book report, an anecdotal snapshot of the Us economy, which is expected to show generally strong figures in line with other surveys (the non-farm payrolls excepted). After yesterday’s falls the Pound seems to be on an recovering trend, which should see it stable throughout today.