INTERACTIVE INVESTOR : “Sterling slips on public borrowing figures”

News - 20 July 2010

Sterling found itself skating on thin ice on Tuesday following an unexpected rise in UK public borrowing in June.

Public sector net debt stood at £14.5 billion - equating to a record 63.9% as a percentage of GDP although it was marginally down on the £14.7 billion shortfall the year before.

This marks the fourth consecutive month the Public Sector Net Borrowing Requirement edged down although economist warn it would have been higher but for public investment moderating to £1.9 billion from £2.8 billion a year earlier.

Howard Archer, chief UK and European economist at IHS Global Insight said: "Despite the disappointing June data, Chancellor George Osborne still looks able to meet his target PSNBR of £149 billion in 2010/11.

"However, much will depend on how well growth holds up over the second half of this year after likely improvement in the second quarter.   "Meanwhile, the disappointing June data is likely reinforce the government's determination not to ease up on its austerity efforts - especially as Standard & Poor's have maintained their negative outlook on the UK's AAA rating."

The pound took the news fairly badly, dropping to a session low of EUR1.1724. It also fell 0.4% against the US dollar, to $1.5219.

However, Tiffany Burk, European market analyst at Travelex Global Business Payments, is optimistic the pound will recover from its current low.

"The downside to sterling is limited because risk appetite remains positive in broader markets," she said. "Equity markets are trading higher and investors remain optimistic over the release of the upcoming stress tests for the 91 European banks. This confidence is helping to support risk appetite."

This optimsim is helping to boost the euro, which has gained massively against sterling in the past three weeks.

Analysts at Currencies Direct added that comments by Germany's Finance Ministry - stating in its monthly report that it feels "the economy has grown significantly in the second quarter and that the recovery should strengthen further in the second half of the year" - are also lending support.

However, many believe its gains against the dollar are due to weak data coming out of the US. Yesterday, the euro briefly hit a 10-week high against the greenback on the back of fresh data showing that sentiment in the home-building sector fell more than expected in July to the lowest level in over a year.

David Page, economist at Investec, said: "To our minds, the dollar has sold off on renewed weakness in a number of activity indicators in the US, including weak housing turnover. We suspect that foreign exchange markets are nervous of sterling following this path, although we are more sanguine of the outlook over the coming months."