New Coalition Government prepare to save the economy
Seismic shifts have taken place since our last blog – transforming the political landscape of the UK, not just with the creation of a new Government but also with the dawn of a new form of coalition politics. The Pound has been through a befittingly up and down week. There was an unexpected Sterling surge right up to voting time which faded away with the uncertainty in the results, spurred on by Mr Brown’s prolonged stay in Number 10 Downing Street. Although opinion polls began to suggest a hung Parliament fairly early on, the show of unity between Cameron and Clegg in sealing the pact of the coalition deal has been remarkable. Perhaps Cameron understood that investors and markets needed to see strong decision making (indicating a Government able to assertively pass measures to reduce the budget deficit). The Cabinet was chosen on Cameron’s first day in office and, although there have been some rumblings amongst backbenchers, there have been no major public dilemmas so far. Since the coalition deal was put in place, the Pound has been more affected by the usual releases of data and like nearly all world currencies at present : the ever deteriorating situation in Europe. There have been three particularly poor UK figures for the new Government to deal with; unemployment figures, inflation figures and the trade deficit. Inflation came in at over 1 percentage point above the Bank of England’s target. The trade deficit refers to the fact that the value of March’s imports exceeded exports by £3.7 billion (up from £2.2 billion in February). This did not match up with the expectation that the decline in the Pound would drive up UK exports and consequently, after the data was released, the Pound fell by nearly two cents against the Dollar. In terms of the ongoing forecast with the new coalition Government, investors are likely to be keeping a keen eye on how well spending cuts are being implemented to reduce the deficit. The reaction to the upcoming emergency budget will be crucial. Hype that Labour have left the nation’s finances in a deprived state is unlikely to implore the greatest confidence, although the most important issue is likely to be that the coalition Government does not begin to part at the seams. In truth, any electoral impact has been overshadowed by what is happening in Europe which has kept the Euro at its weakest levels against the Dollar in four years and looks set to continue. Significant steps have been taken by the Euro-zone to try and protect the Euro. First, Euro-zone nations pledged a near $1 Trillion deal to prevent other nations finding themselves in the same situation as Greece but this only gave any real support to the Euro for a day. On Tuesday night, traders were alarmed by a sudden ban on naked short selling and naked credit swaps by Germany’s financial regulator. The decision bans speculators from bets against European Government bonds and banks – in essence preventing them from both exacerbating and profiting from the debt crisis. However, this is a cause for concern to investors who may not be able to hedge their European holdings or sell assets as the region’s debt crisis worsens and has in fact caused the Euro to plummet. German Chancellor Angela Merkel has spoken-out about the deep Euro crisis, stating that it is the greatest crisis for Europe in decades and the Euro itself is in danger- requiring the drastic steps which are being taken to address exceptional volatility. The US Dollar is the one currency sitting strong and mighty as it benefits from all this uncertainty. If you have US Dollars to sell or Euros to buy, the rates are in your favour; if your transfers are occurring the other way round, there is still a need to contact your broker. Now is the time to maximise profits or minimise losses depending on the currency transfer you require.