UK warned of five years of public spending cuts

February 4th, 2010 by Toby

Pound:
Sterling is trading within tight ranges against the Euro and has fallen significantly in the last 24 hours against the USD down from 1.60 into the higher area of 1.58. Key bank of England policy decisions are due at 12pm today with the UK central bank expected to pause its QE programme and keep interest rates at record lows. Economists view a halt in QE (money printing) as an indication to the market of the first round in tightening monetary policy. Some of the recent economic data we have seen (especially the GDP number) and tighter public sector spending is likely to see rate rises occur much later this year than some had anticipated. If the BoE does pause in QE, sterling is likely to make some gains against the majors as speculation on what move the BoE will make is removed from the currency markets.

In separate economic news the Times newspaper reported that the Institute for Fiscal Studies (IFS) said yesterday that departmental spending would be cut for at least five consecutive years as the government battles to curb public sector spending. To close this massive hole in UK public sector finances it was reported that the government must raise an extra £13 billion through tax rises or spending cuts by 2015, a great excuse to take even more money out of our pockets! More UK inflation (PPI) data is due out tomorrow morning at 9.30am.

US Dollar:
The Dollar was up against Sterling and the Euro this morning as positive U.S data and upbeat rhetoric by the Federal Open Market Committee suggested the U.S economy was improving at a fast enough rate for interest rate increases to be a strong consideration in the near future, ahead of other nations. Suggestions that the Federal Reserve might reduce some of its stimulus has prompted investors to back the U.S currency, as it becomes a more attractive prospect for investment. “The dollar is stronger in anticipation of a good number,” said Richard Franulovich, senior currency strategist at Westpac Banking Corp. in New York. “A strong job number…job recovery would mean the Fed has to get away from its emergency policy settings. It makes the dollar more attractive compared to the euro or the yen.”

The Dollar continues to put pressure on Sterling as well ahead of the BOE announcement today, with the results likely to move the currency pair in one direction, which one will depend on how upbeat the rhetoric is of the U.K economy and whether the governments money printing program (Quantitative Easing) will be slowed down. GBP/USD 1.5859, EUR/USD 1.3836.

Euro:
The Euro remained in tight ranges and maintained current weakness against Sterling, while losing further ground on the Dollar. Traders are weighing up whether the U.S economy or Euro zone is performing better, with Greece’s debt problems supporting the U.S view. “The Euro has much more room to drop, probably to the $1.35 level,” said Carol Hurley, senior market strategist at brokerage firm Lind-Waldock in Chicago. “The market is worried about how they (the European Union) are going to fix Greece, Portugal and Spain. The market is also worried about other countries having fiscal difficulties and what it’s going to cost the European Union to fix it if they do indeed bail them out.” If U.S data continues to be positive, and government rhetoric suggests a U.S recovery is in full swing, the state of nations in the Euro zone including debt burdens in Portugal and now Spain should weaken the single currency further against the Dollar in coming months.

Against Sterling, the BOE announcement today will be key, with any suggestion of a reduction in Quantitative Easing (money printing) likely to boost Sterling further against the Euro zone currency that is already under pressure. GBP/EUR 1.1456, EUR/USD 1.3831.