Sterling Lower After Budget

By Moneycorp

Higher borrowing and higher taxes weigh on sterling. Investors nervous about Britain’s AAA credit rating. Dollar keeps a low profile.

Sterling only lost a cent against the dollar over the course of the week but it made a big noise about it, oscillating viciously across a range of nearly four cents. The $1.44 low came on Wednesday and the high on Friday was not far short of $1.48. The pound opened this morning in London at $1.4550.

There were two or three non-stories for sterling. Although the retail price index went negative, as expected, the consumer price index – the one the Bank of England follows, showed inflation still close to the top of its band at 2.9%. Unemployment continued its depressing upward trek with another 74,000 jobs lost in March that took the unemployment rate to 6.7%. Retail sales for that month were higher than in February, making for a 1.5% improvement over the 12 month period. None of these developments had much impact on the pound because there were bigger fish to fry.

The biggest of the lot was Wednesday’s budget speech. Investors – especially those based in London, and there are lots of them – focused on two aspects of the chancellor’s speech: the massive levels of government borrowing that they will be expected to fund and the 61% total tax that the more successful among them will have to pay on the top slice of their earnings. Investors found neither aspect particularly appealing and they reacted in time-honoured fashion by selling sterling.

The other big story was a bit of a fake, really, but it still led to the pound taking another hit on Friday. The Daily Telegraph cobbled together a piece about credit ratings agencies’ attitude to the UK economy post-budget. Even though the agencies – Moody’s and Standard & Poor’s – made particularly non-committal comments The Telegraph still managed to open its article with the headline “Borrowing puts UK’s AAA rating in danger”. The market swallowed the story hook, line and sinker, giving sterling its second kicking of the week.

The dollar kept a lower profile than usual, assisted by a mid-month shortage of economic data. With investors still generally positive about equities the US currency missed out on the nervousness that it seems to need to thrive. The ecostats, such as they were, were more hindrance than help. Weekly jobless claims, both new and continuing, were higher than forecast. New and existing home sales were a disappointment. Durable goods orders did not fall by as much as analysts had forecast but were still lower on the month.

A week ago it was clear that sterling faced specific risks, with the budget top of the list. Event risk this week is less evident and there is no obvious reason to look for sterling to escape the last seven days’ range. It is probably too much to hope for a recovery but after the stick it has taken recently sterling should at least be able to consolidate at these levels. Buyers of the dollar can therefore revert to the tried and tested strategy of hedging half their exposure. Those requiring absolute price certainty should, as usual, cover the whole amount.

For more information and expert guidance on the currency markets, call Moneycorp today on +44 (0)20 7589 3000, don’t forget to mention International Horizons to receive the best rates. Alternatively go to the Moneycorp website where you can open a free, no obligation Trading Facility.

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