Sterling drops on Bank of England comments

Good Morning. The pounds strength after a government was formed did not last long, and comments from the Bank of England and poor employment data caused rates to drop away during trading yesterday. We’ve recovered slightly this morning, and rates @08:30am are as follows:

  • GBP/EUR 1.1754
  • GBP/USD 1.4900
  • GBP/AUD 1.6507
  • GBP/NZD 2.0715
  • GBP/CAD 1.5061
  • GBP/ZAR 11.049
  • GBP/JPY 139.22
  • GBP/CHF 1.6523
  • EUR/USD 1.2673

Bank of England comments
BoE governor Mervyn King warned risks to growth had increased and that the EU debt crisis had made it more urgent for Britain to cut a budget deficit, which is by far the biggest amongst industrialised nations. The central bank also suggested UK interest rates would stay at a record low 0.5 % for far longer than markets had expected as it forecast inflation would be below its 2 percent target in two years even with rates at current levels.

The comments caused the pound to drop against the Euro and US Dollar. Now that the political uncertainty that has been dogging the pound for some time is over, markets are now back focusing on the economic problems in the UK that have not gone away.

Pound recovering slightly this morning
Markets are now looking to the new coalition government to make the large cuts needed to reduce the deficit. “You have to remember that sterling has fallen quite a lot based on political uncertainty so by definition if you remove huge uncertainty sterling should rise,” Neil Mellor, currency strategist at Bank of New York Mellon.

The positivity may not last long though, as once the honeymoon period is over, the pound is likely to remain under pressure. There will need to be some significant cuts made in the coming weeks and months in order to reduce our debt. This coupled with the fact our interest rates are likely to remain lower than other countries will likely hamper the pound making further gains.

So, we’re almost back to normal and markets are no longer focusing on the election. markets are now looking at what cuts will be made, by how much, and how quickly they will be implemented. In the long term this should put Sterling on a steady path to recovery, but things are likely to get worse before they get better.

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