Pound gains on public borrowing forecasts
The Office for Budget Responsibility which was created by the new government coalition forecasted state borrowing would fall faster than originally thought, partly due to higher tax receipts. There was also support from Sterling when the Bank of England said that inflation would rise and there would be a good chance of interest rates rising later this year.
When interest rates go up, it gives a better return for investors and therefore drives investment towards Sterling. This strengthens the currency and has caused the pound to rise slightly in anticipation of higher rates.
There was some caution however, as the UK's fiscal watchdog downgraded forecasts for economic growth from 2011. Some analysts said worries about fiscal austerity choking the UK economic recovery could pressure sterling further down the line.
Pound to US Dollar ForecastMarkets began last week recovering losses suffered by the Pound versus the Dollar from previous weeks trading. There was no real economic data to trade from so Sterling’s main area of support came as risk aversion eased and market confidence improved.
It wasn’t all plain sailing for Sterling though; Fitch rating agency issued a debt warning on the UK. The rating agency’s statement described the fiscal challenge facing the United Kingdom as “formidable” and said that to tackle the issue would warrant a strong medium term consolidation strategy.
The European debt crisis has made markets extremely sensitive to any form of debt concerns and the Pound lost over 1% of its value against the Dollar as investors sought safety in the US Dollar. After the initial shock to the markets wore off, focus returned to the Bank of England and with risk aversion on the Euro easing also gave Sterling the opportunity to recover although gains were extremely slow.
Safe haven demand for the Dollar remains strong as investors are still very concerned about debt defaults and the risk of a second global economic downturn due to the crisis in Europe. Fed Chairman Ben Bernanke testified before congress and described the pace of the US recovery as moderate but warned that the recovery would remain a slow and protracted process with unemployment levels expected to remain high.
US trade balance figures showed the deficit in the US increase slightly to $40.3bln from $40.0bln. U.S. retail sales unexpectedly fell in May for the first time since September 2009 following a record slump in purchases, adding to fears the economic recovery was losing some steam however, a rally at the end of the week saw the greenback recovery a large portion of its losses against the Pound as weaker UK data pulled Sterling lower.
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