Wednesday, 08 July 2015 17:30
LONDON: Sterling fell another half a percent against the dollar and euro ahead of Britain’s post-election budget on Wednesday, hitting a four-week low against the dollar which reflects a return of concern over the pace of economic growth ahead.
Sterling had jumped on the back of some better economic numbers in recent months and the returning of a majority Conservative administration in May’s general elections.
But with Greece’s problems threatening another shock to European economies, UK finance minister George Osborne’s promise to go harder on austerity and start reducing overall debt soon bodes ill for the immediate outlook. “Osborne has frontloaded some of the bad news so the end result today may not be quite as bad for sterling, but on top of Greece it is still an austerity budget,” said Jane Foley, a strategist with Rabobank in London.
She said it was hard to disentangle the moves in sterling and falls in gilt yields over the past day or so from money seeking out a safe haven from the euro zone’s troubles.
But after a repricing of short-term interest rates last month showed markets were putting a Bank of England rate rise back on the table for the end of this year or start of next, there is room for a retreat. Gilt yields, which have fallen 27 basis points in the past week, were flat at 1.83 percent. Five- and two-year yields have also fallen, although not quite as sharply.
Sterling was down 0.5 percent, falling below $ 1.54 for the first time since early June. Against the euro it fell to its weakest in two weeks at 71.78 pence per euro.
Osborne will lay out how he plans to reshape the economy by chopping welfare spending and easing the tax bill for workers in the first budget in nearly 20 years in which his the Conservative Party has had a free hand. He is due to start speaking at 1130 GMT.
“Even if there is slightly less spending restraint announced than feared, gilts should do OK and the pound won’t get much help,” analysts from France’s Societe Generale said in a morning note.
