Foreign Exchange: Pound Weakens Against The US Dollar

The Pound fell against the majority of the 16 most actively traded currencies yesterday, in advance of the Chancellor of the Exchequer George Osborne announcing the details of the government’s spending cuts this week.

The Pound fell back on the foreign exchange markets from the $1.60 level against the US Dollar.

Despite the tough line expected from the Government, the Pound is under pressure  as there is some concern that the cuts will not be enough to cut the deficit fast enough.

The Centre for Economics and Business Research stated yesterday that the Bank of England will expand its asset-purchase plan by £100 billion and keep interest rates at a record low of 0.5% until at least the fourth quarter of 2012.

All in all, the Pound is looking vulnerable and is likely to fall further against the majors, as we build up to Wednesday’s announcement.

Jane Foley, a senior foreign exchange strategist at Rabobank International, said that ” what the market fears is that some of the cuts announced in the budget may be delayed and potentially it will take longer to cut down the deficit.”

The Pound was down almost 1% against the US Dollar by the close of trading last night.

The UK currency also fell towards another 6-month low against the Euro, this despite rising earlier to as high as 1.1492.

The Comprehensive Spending Review is set to cut most ministerial budgets by a quarter. This will contribute to eliminating the £156 billion deficit within four years as Osborne must achieve.

The minutes from the Bank of England Monetary Policy Committee meeting in are also to be released on Wednesday and will no doubt impact on the Pound.

The last MPC minutes gave a strong indication that policy makers had adopted a “dovish inclination” with leaning to more stimulus being required. If a similar sentiment is expressed tomorrow then the Pound is likely to weaken further.

Former BoE policy maker David Blanchflower yesterday said that spending cuts would be a “terrible mistake.”

He said that “we are desperately in danger of a double dip, and the last thing you do in a recession is make things worse. The BoE unfortunately looks like the only Plan B the government has, but quantitative easing just doesn’t act fast enough.”

EUR/USD

A decline in Asian stocks increased demand for the security of Dollar denominated assets which led to the US Dollar rising for a third day in a row against the Euro

The US dollar also strengthened against 14 of the 16 most actively traded currencies. This was off the back of US Treasury Secretary Timothy Geithner saying that the nation will preserve confidence in a strong Dollar and “will not engage” in currency devaluation.

The Euro found support below $1.3850 against the Dollar and then rallied steadily through to the close of trading last night.

Market Analysis by Adam Solomon,Torfx

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