No escape for Sterling

As fiscal concerns and a continuation of the dovish stance from the MPC continue to weigh on the pound. Throw into the mix increased political uncertainty with the narrowing of the polls and the future does not look bright for the pound. Today we had members of the MPC commenting on the quarterly inflation report where the bank lowered its growth and inflation forecasts underlining a dovish stance on monetary policy. King was his usual cautious self and highlighted the fragility in the UK economy and reaffirmed that inflation is likely to come down later in 2010. On the deficit he did note that we have a very large fiscal deficit and that rating agencies are to remain “somewhat uncertain” until the deficit is tackled. King affirmed that he would be immensely surprised if rating agencies downgraded the UK…not so confident myself- you can read about my opinion on this in the following link:-

http://business.timesonline.co.uk/tol/business/economics/article7037016.ece

Another MPC member David Miles noted that the decision not to raise QE was very finely balanced and this has contributed along with the dovish tone overall to sterling slipping 1% against the USD and over 0.5% against the euro. Later this week we have important feedback in the form of the second revision of UK GDP and also important numbers from RBS and Lloyds- especially critical due to the government involvement.

Elsewhere the euro is still looking shaky and lost further against the USD (although gained against the pound). The German IFO survey was pretty much as expected although slightly weaker. Over to the US and dovish comments from San Fransisco’s Federal reserve President Yellen got the markets thinking in regards to future Fed policy. This helped the USD to weaken on later trading last night, however it has paired those losses in this mornings trading. If a dovish policy starts to feed through from the Fed then we may see the USD lose some of its recent gains, especially if risk trades come back into play.

report by Phil McHugh

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