Pound falls on Political uncertainty

Last Weeks trading
After some weeks of continued strength for the pound, this all came to an end last week as rates dropped away again. On Wednesday last week, rates had hit 6 and 7 month highs against the Euro and US Dollar respectively. The main reason for the sudden decline Thursday and Friday was continues political uncertainty in the UK.

We had many cabinet ministers resign, following by rumours that Gordon Brown was going to resign, rumours which were quickly rubbished by number 10. Poor showings for the government in both the local and European elections have also put pressure on the pound.

The uncertain political situation encouraged investors to sell the pound, particularly as they were unsure how long it would hold on to gains of nearly 10 percent it racked up against the dollar last month — its biggest monthly gain since 1985. This sell off of Sterling is what caused the value to slide.

“The pound is suffering broad weakness due to political uncertainty,” said Neil Jones, head of European hedge fund sales at Mizuho Corporate Bank in London. “It’s not good to have no government structure,” he said, adding that political uncertainty was shifting focus away from efforts to ensure economic stability.

Sterling had been riding high in recent weeks on hopes that the worst was over for the UK economy. Some analysts said the impact on sterling from the UK’s political woes was likely to be short-lived though, so we could see a recovery this week.

“The limited scope for plausible economic policy shifts in the UK will remain unchanged irrespective of whose hands are grasping the levers of power,” said Neil Mellor, a currency strategist at Bank of New York Mellon. “The burgeoning fiscal deficit in the UK is a problem that crosses party lines and one that would invite political disaster should it be tackled prematurely,” he added.

The pound has fallen against the dollar this morning after poor European Election results, but us still close to 1.14 against the Euro after falling into the 1.12’s at the end of last week. Elsewhere, there were reminders that the UK economy is far from out of the woods yet. Data showed UK construction output tumbled by 9 percent in the first quarter, which the statistics office said will knock 0.3 percentage points off UK gross domestic product.

So, all eyes this week will continue to be focused on Political Events, and also the raft of UK economic data that will give clues as to how the UK economy is faring in the recession.

This Weeks Data
Lots of data from the EU, US and UK this week. The most significant data is listed below, but the main events to watch for are:

Germany – The largest ecomomy in the EU, figures from Germany can have a big impact on the value of the Euro and so affect GBPEUR exchange rates. Today we have Factory orders, and tomorrow Industrial Production. A good indicator of how these sectors are performing.

UK – House Price Data today, wednesday sees Trade Balance, Industrial and Manufacturing Production. This will likely affect Sterlings value, and of course ongoing political events will also continue to have an impact

New Zealand – Interest Rate decision on Wednesday, following by Retail Sales data Thursday.

EU – ECB Monthly report on Thursday, and also a speech by ECB president Trichet on Friday. Watch any comments carefully as surprise announcements could strengthen or weaken the Euro.

Monday
Ger – Factory Orders
UK – RICS House Prices
UK – BRC Retail Sales

Tuesday
UK – DCLG House Prices
Ger – Industrial Production

Wednesday
UK – Trade Balance
UK – Industrial Production
UK – Manufacturing Production
US – Mortgage Applications
US – Trade Balance
NZ – Interest Rate Decision

Thursday
AUS – Employment & Unemployment
EU – ECB Monthly Report
US – Retail Sales
US – Jobless Claims
NZ – Retail Sales

Friday
G8 Meeting
EU – Industrial Production
EU – Trichet Speech
US – Import Prices
EU – Trichet Speech

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