Prime Minister David Cameron said yesterday that the government had discovered “very bad” spending decisions by the Labour Party. As a result the Pound weakened, reaching the lowest level since March 31st 2009.
The Pound fell to a low of $1.4259 against the Dollar and also lost ground against the majority of the 16 most actively traded currencies.
The Chancellor of the Exchequer George Osborne said that he will give details of an emergency budget on June 22nd.
The ever-widening budget deficit has contributed heavily to the Pound’s 5.1% decline against the Dollar this year. The incoming chief secretary at the UK Treasury David Laws found a note last week from his predecessor Liam Byrne, saying “Dear Chief Secretary, I’m afraid to tell you there’s no money left.”
Analysts at BNP Paribas SA have recommended to investors that they should sell the Pound against the Yen because the U.K’s coalition government will impose “brutal” spending cuts, while in decline in global stocks will boost risk aversion, sapping demand for the Pound. The UK currency fell for a fourth straight day against the Yen yesterday, slumping as much as 2.5%.
Inflation rose again in April, hitting a 17 month high, forcing the governor of the Bank of England Mervyn King to write a letter of explanation to the Chancellor.
This increase in inflation beyond the government’s upper 3% limit is not expected to last and UK interest rates are not expected to be raised at this stage from the lowest level on record. The Central Bank in its quarterly inflation report last week said that inflation may be faster than previously forecast in the coming months, before it slows below the 2% target because of the slack in the economy.
According to estimates from JP Morgan Chase & Co, the Pound may extend this year’s 12% drop against the Canadian Dollar and fall towards $1.35, after the UK currency failed to breach the $1.60 level last week. Sterling looks poised to test its 1984 low of $1.4580 before declining through the $1.50 support level.
The Euro fell towards its lowest level against the Dollar since April 2006, despite assurances from European finance ministers that the austerity plans to combat the region’s debt crisis won’t derail the economic recovery.
Drawn from Market Analysis by Adam Solomon, TorFX
Want to know more about Foreign Exchange? Check our article ‘Foreign Exchange Explained‘.
Any opinions expressed in this document are aimed at helping clients understand market conditions and developing trends. Readers are wholly responsible for their own trading decisions.