Sterling Gets Off Lightly (1.105)

[Reportage]

Investors were evidently not surprised that the chancellor's pre-budget statement did not address the budget problem. Greece's fiscal position creates potential strains for the euro.
A range of less than a cent and a half kept sterling fairly close to 1.1050 Euro throughout the week. It opened at that level in London this morning, unchanged from a week ago.

In a week during which there was ample opportunity for investors to give the pound a good kicking they were surprisingly benign towards it. It did lose a little ground on several fronts but to nothing like the extent it might have done. Sterling's main handicap continued to be the widening gap between government spending and the tax revenues which pay for it. Attached to that concern is a nagging worry that the growing budget deficit could cost Britain its valuable AAA credit rating. If that were to happen the government would have to pay more for its borrowings, of which there will be substantial amounts over the coming years.
The economic data did sterling no great favours either. The Halifax and Rightmove both reported another month of rising house prices, although they warned that future gains would come more slowly. Investors were dismayed to see that industrial production did not go up at all in October; they had been looking for an increase. October's trade deficit was less than wonderful but at least the previous month's figures were revised upwards. Factory gate prices rose by 2.9% in the year to October, suggesting that consumer price inflation will not remain low indefinitely.

The surprising non-event of the week was the chancellor's pre-budget statement on Wednesday. Mr Darling appeared to make no effort to balance the nation's books by reducing government spending to an affordable level. Instead, he landed greedy bankers with a populist one-off tax and rearranged the deck chairs in preparation for the general election that could come as soon as March. One possible reason for investors' lack of reaction is that they had such low expectations for the budget curtain-raiser that they were incapable of disappointment. At least the Bank of England's monthly policy meeting delivered no surprises. The Bank rate remains at 0.5% for another month.

Investor dismay at Britain's static industrial production in October was nothing compared to their surprise at the equivalent German figure. German production fell by -1.8% in the same month. It was just about the only Euroland statistic to attract the market's attention during a week that saw no heavyweight pan-euro zone data.

What investors did see, however, was plenty of developments on the credit front. One reason for all the agitation about Britain's AAA credit rating was the way Greece was going downhill. Ratings agency Fitch downgraded Greece to BBB+ with a 'negative' outlook. BBB+ is still what they call investment grade (as opposed to junk) but it isn't great. Greece's problems are similar to those of the UK but in trumps. Britain can devalue its currency if it so chooses - or if the market insists. Greece cannot because it is not the sole proprietor of the euro. From the euro's position things are not critical at the moment but investors are keeping a close eye on developments because there is nothing positive for the euro in the situation.



Need foreign currency at commercial rates of exchange and with no commission fees?

Open a trading account with MoneyCorp - opening the account is completely free of charge and there is no obligation to use the account for your currency transfers - but it does give you immediate access to the latest rates, rate comparisons and advice from currency specialists.

Make a no obligation currency enquiry and see how much you could save...