IMF warn on UK finances

A cagey day in the markets yesterday as mixed data prevented any dominent trend in the currencies. Sterling struggled to make a push for 1.65 against the dollar as news that CIT would likely head to bankruptcy maintained a cap on the bulls. In the US we saw data from Initial jobless claims and continuing claims which both came in better than anticipated- however the fall in initial jobless claims was attributed to seasonal factors and therefore not taken as a bullish number in the markets.

Instead the markets focused on corporate earning figures and yesterday we saw good numbers from JP Morgan, IBM and Google; this helped to stage a late rally in equities with the Dow Jones Industrial Average rising 1.1%. In the FX markets this would normally lend to selling pressure on the USD and the YEN, however we have opened this morning with the USD and Yen stronger. In Asian trading the markets again turned nervous and the pound was dented by the YEN and the USD in particular. Feedback from the IMF focusing on the health of the UK economy did not help the pound; the IMF suggested that extra capital would be required by UK banks if the economic situation declines, in addition there was also a warning for Gordon Brown that a ‘credible plan’ was necessary to sure up the public finace position- the word credible denoting that political rhetoric will not wash and clear action was required. In a damning assessment the IMF stated that “Market conditions suggest the UK has been getting the benefit of the doubt, both in the Government bond market and also the foreign exchange market,” and “This benefit of the doubt is not going to last forever and it’s going to be important that the Government does not test the limit of the market’s confidence”. Confidence in the markets was also shaken by news of the bombings of 2 hotels in Jakarta with reports of 9 dead- this lifted the USD and the YEN.

More corporate earnings today from the US will lead the sentiment in the markets. It will be interesting to see if the pound can hold on to current levels of 1.63 against the USD as there is not much in the way of support below here for a move down to 1.61.