Pounds and politics don’t mix
Mutually detrimental – that’s one way to describe the rocky relationship between politics and economics in the UK as the promise of a stalemate in the coming election looms like a threatening rain cloud over the nation’s fiscal picnic spread. There will be no extra-time, no penalty shootouts and no debatable referee decisions, however there may be a few grown adults crying because a hung parliament means there will be bad times ahead for the pound. In fact, the nation’s fiscal complexion is so repulsively hideous not even the politicians can bear to stare it in the face. So for a realistic appraisal of what’s going on (at least in the forex market) you’ll always have this blog to depend on. Last week wasn’t a good one for UK currency, with trends looking bearish from the off. In fact, it wasn’t much better for other majors either, with the euro still banging its head against the wall over Greece’s problems and the US dollar down due to its stagnant jobs market. On Tuesday gilt figures rose and BoE Governor Mervyn King said the UK's recovery was fragile and risks to the MPC's central view of a gradual recovery remained to the downside. So the pound slid once again. The euro, however, was a little steadier on the tightrope after a newspaper reported Dubai provided more funds to Dubai World, easing concern that European banks will incur losses on loans to the Gulf emirate. As to the dollar, restrained consumer spending and home sales in the US underscored Federal Reserve Chairman Ben Bernanke’s comments on Wednesday that the economic recovery is “nascent” and would still require interest rates near zero, keeping the greenback on a low. By Friday we were all a bit tired of hearing how bad things were for the pound. Although UK GDP figures came in above expectation for the 4th Qtr at 0.3% growth (against 0.2% forecast), sterling continued to slide. Currently there’s plenty happening that doesn’t work to the pound’s advantage. As well as political and fiscal fretting, the potential purchase of AIG from Prudential is causing large negative M&A flows out of sterling and into the dollar. Today UK currency is ominously fragile and it would certainly be wise to keep an eye on its movements for anyone looking to profit at sterling’s expense.