Sterling gains after opinion polls – will it last?

Good Morning. Sterling fell yesterday morning over EU warnings over the level of UK debt. It recovered slightly in the afternoon after better than expected housing data and opinion polls showing the Conservatives are back on course to win the election. Today though we have more data that could well wipe these gains out. More on that in a moment. First, rates @ 08:30am 17th march are as follows:

  • GBP/EUR 1.1050
  • GBP/USD 1.5220
  • GBP/AUD 1.6525
  • GBP/NZD 2.1368
  • GBP/CHF 1.6049
  • GBP/CAD 1.5418
  • GBP/JPY 137.90
  • GBP/ZAR 11.176
  • EUR/USD 1.3775

EU Warning over debt
Gordon Brown was dealt an embarrassing blow last night when the EU gave warning that Britain must do more to curb its spiralling debt. The European Commission wants Labour to outline further spending cuts and spell out where cuts will come from.

The intervention, a week before the Budget, will electrify the debate over the economy. David Cameron promised in a BBC interview last night to fight the election campaign by going farther than Mr Brown in saying where cuts will be made. The Commission is due to release its latest assessment of Britain’s plans to reduce the deficit today, but a leaked draft makes uncomfortable reading.

Markets reacted to these comments and we saw big selling in Sterling in the morning, which caused weakness and exchange rates to fall.

Housing Data and Opinion Polls
Sterling rebounded from early falls on Tuesday, aided by robust housing data and opinion polls, though analysts said worries over Britain’s fiscal health and political uncertainty would continue to weigh on the pound.

Sterling had been under pressure as the market sold the pound in reaction to a European Commission draft recommending more fiscal cuts in the UK, adding to concerns over a spiralling budget deficit. Stronger than expected housing data from DCLG, showing prices rose 6.2 percent year-on-year in January provided some support, but this was limited.

Analysts said opinion polls showing Britain’s main opposition Conservatives were back on course to win an election expected in May. Financial markets fear a minority or coalition government would fail to cut effectively Britain’s budget deficit, forecast to reach 178 billion pounds this year, or more than 12 percent of gross domestic product. “Supporting the short-covering in sterling this morning was the publication of more market-friendly opinion polls,” said Jane Foley, research director at Forex.com.

Today’s Data
Some important bits and pieces for the UK this morning. At 09:30am we’ll see earnings data and jobless claims. The most important bit today though is the BoE minutes from the recent interest rate decision. Markets will be looking for any comment on further Quantitative Easing. If there are, then expect yesterdays gains for the pound to be short lived.

UK – Average Earnings
UK – BoE Minutes
UK – Claimant Count
UK – Jobless Claims
EU – Construction Output
US – Producer Prices

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