There will be persistent fears over the UK government debt position, especially as the pre-budget report did little to tackle the underlying deficit. There will be further speculation over a credit-rating downgrade and these fears are liable to intensify if there is any evidence of a renewed downturn in the economy. Sterling will also tend to lose support if there is a sustained deterioration in global risk appetite. In this environment, Sterling is likely to have weaker tone and there is some risk of heavy selling pressure on a wider loss of confidence.
Sterling remained under pressure during the week as government debt fears persisted, although the degree of selling slowed later in the week with Sterling finding support below 1.62 against the dollar.
The trade data was weak with a GBP7.1bn deficit for October, the highest deficit level since January. The industrial data was weak with production unchanged for October compared with expectations of a 0.5% increase.
The impact was offset to some extent by the Halifax house-price index which recorded the fifth successive monthly advance while the CBI industrial survey also recorded an improvement. The NIESR also recorded a return to growth with a GDP expansion of 0.2% in the year to November
In the pre-budget report, the government announced a slightly higher budget deficit forecast for the current fiscal year of GBP178bn with very little change for next year with a deficit of GBP176bn.
There was a proposed tax on banking-sector bonuses, but little in the way of fresh measures to curb near-term borrowing levels, although labour-market taxes were raised slightly from 2011. There were increased fears that no significant action would be taken before the general election which must be held by June 2010.
In this environment, there is a high risk that market confidence in the debt situation will deteriorate further and there was speculation that there could be a very serious loss of confidence which could trigger heavy Sterling selling. There was renewed selling pressure following the report, but Sterling again found support below 1.62 against the dollar.
The central bank policy was in line with expectations with interest rates held at 0.50% while the amount of quantitative easing was also left on hold at GBP200bn. The bank expects that the bond-buying programme will be completed in 2 months and that it would reassess the situation then.
Swiss franc:
The National Bank policies will remain a very important focus and the most recent comments from bank Chairman Roth will dampen expectations that the intervention policy will be suspended, at least in the short-term . The franc will also tend to gain some support when global risk appetite deteriorates. From a longer-tem perspective, markets will also expect the central bank to resist a policy of currency debasement and this will certainly tend to limit any selling pressure on the franc.
The dollar strengthened against the franc during the week, but hit tough resistance close to the 1.03 level. The Euro advanced to the 1.51 area, but again stalled close to this area.
In its quarterly monetary policy decision, the National Bank left interest rates at 0.25%, in line with expectations. The bank also maintained its policy of intervention to prevent franc appreciation while corporate bond purchases were scaled back. This represented a gradual move towards a more normal policy, but interest rates were expected to remain at very low levels over the next few months.
The decision to maintain the intervention policy also tended to curb franc support with expectations that any advance will be blocked by the bank. |