The currency blog

That could be one reason for the fall in sterling since close of play yesterday. The Pre-budget report will set out government plans for tackling the UK deficit and also define growth forecasts. A big factor will be how the government plans to reduce the deficit which is a major issue for the UK economy and the next government- expect lots of political sabre rattling as Darling attempts to set out a fiscal election strategy. The government has promised to cut the deficit in half within 4 years and the market will want to see a viable plan for this to give comfort to sterling. Other items could include a change in the growth forecasts, cuts in spending and increased taxes- possibly on bankers bonuses or even banking institutions…Darling says his plan will maintain credibility with investors, while protecting people most vulnerable to the recession- it needs to.

The pound has drifted lower against the USD, EUR and the YEN; the fall in pound commenceed in Asian trading and was instigated by a market order to sell GBP and buy EUR. The Dubai crisis reared its head again as Dubai stocks fell and worries mounted on Dubai World’s debt restructuring once again; this may have contributed to the dip in the pound. In addition moody’s described the UK as weaker than top rated peers including Germany and France. So probably a number of factors leading to a lower pound this morning. One good snippet of news was that UK Halifax November house prices jumped 1.4% against the expectation of a 0.5% rise- however not enough to support the pound.

Looking at the USD, Fed chairman Ben Bernanke brushed aside the recent positive non-farm payroll report by underlining that the job market was “weak” and more sustained evidence is needed to assure of a self sustaining recovery. Fridays US retail sales data will be the next window to assess the health of the US economy.

Discuss on this on the Currency Exchange Forum