British Pound Perks Up, Can the Uptrend Be Sustained?

By: Seven_Days_Ahead

The Pound suffered a steep sell-off against both the Euro and the Dollar during the financial crisis/recession as the UK’s public finances deteriorated at a faster pace than other developed economies.

Indeed, as the recession seemed to go on longer than in many other G7 economies, the Pound at one point looked at risk of breaking par against the Euro and approaching lows not seen since the mid 1980’s against the Dollar.

But a change of government in the UK with a focus on cutting the budget deficit, mainly through public spending cuts has put a floor under the currency, especially against the Dollar. The UK has set out a tough and credible plan to reduce its budget deficit and in 5 years time forecasts a structural budget surplus.

While there are fears that the medicine could tip the economy briefly back into recession, the most likely scenario is a period of slower or indeed flat growth as the Bank of England keeps interest rates at historically low levels.

Although there is some noise from one or two MPC members about the need to begin a gradual tightening process, we judge the majority on the MPC realize that the government’s plans to effectively drain spending and resource utilization from the economy will bear down on inflation and monetary policy needs to remain loose to offset what is set to be a period of aggressive fiscal retrenchment.
Compare and contrast this with the US: The US economy, which until recently looked embarked on a self sustaining recovery, now looks to be weakening. Virtually every area of the US economy is causing some concern:

•      The ISM manufacturing and non-manufacturing surveys while still forecasting growth, are doing so at steadily slowing rates,
•      Retail sales show consumer demand is weak,
•      Non-farm payrolls and Jobless claims report not enough jobs are being created to employ new entrants to the labour market, let alone re-employ the millions thrown out of work during the recession, and
•      Inflation is very low, perhaps too low?

The Fed is now concerned inflation may fall too far. And whereas only a few weeks ago the debate was when should the Fed begin to tighten policy, the latest FOMC minutes reveal policy makers are concerned enough to talk about additional easing, albeit judged not necessary quite yet.

While a slowing US economy would ultimately be bad news for the UK economy, the Pound currently benefits from the very different outlook for public spending in the two countries. As previously said the UK is on a mission to eliminate its structural government deficit, the US is still spending with alacrity and if he could get it through Congress, Obama would deploy a second stimulus racking up yet more debt and speeding the US debt to GDP ratio ever closer to 100%.

So, for now, the Pound benefits from the dynamics at work both in the UK and the US economy.

The Technical Trader’s view:

WEEKLY CHART The market is stuck between two major levels of support and resistance. And above the market is a critical resistance from the low at 1.5709. Now look closer.

Mark Sturdy
John Lewis

Seven Days Ahead
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Mark Sturdy, John Lewis & Philip Allwright, write exclusively for Seven Days Ahead a regulated financial advisor selling professional-level technical and macro analysis and high-performing trade recommendations with detailed risk control for banks, hedge funds, and expert private investors around the world. Check out our subscriptions.

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