Sterling's jump after the announcement of the new government proved to be short lived. Although the Pound did jump up almost 2c against the Dollar after the government was formed, it soon started to drift down, and even the charm offensive that Cameron and Clegg went on yesterday didn't help. The new government gives 5 cabinet seats to the Lib Dems, including the ill defined role of Deputy Prime minister to Nick Clegg. However as you would expect the Conservatives have retained control over the Treasury, and George Osborne has repeated his claim to hold an emergency budget within 50 days of taking power, the World Cup covers some of that period so the budget is likely to be sooner rather than later, probably sometime around mid June. The coalition government has stated their desire to accelerate the repayment of the deficit so this budget may prove to be Sterling positive, as will further signs that the coalition is stable, but that will only come with time.
Although the new government did prove Sterling positive, it had to contend with the latest Quarterly inflation report from the MPC, and Mervyn King painted an overall pessimistic tone. King reiterated the need to repay the deficit, and seemed to indicate that interest rates would stay low for a long time. The new government's commitment to reduce the deficit with spending cuts rather than tax rises would seem to fit into this picture, as although it may not cause a double dip recession as Labour warned, it will depress growth and leave some spare capacity in the economy dampening inflation. King repeated his conviction that inflation would come back under 2% in the medium term, and the lower expectations of interest rates allowed the Pound to back towards 1.48, although it has recovered up to around 1.49 overnight.
The Euro has continued to decline after it's brief spike caused by the bailout, slipping down to below 1.2650 against the Dollar. As Trichet has said this bailout is the back stop, once sovereign nations default there is nowhere else to go for help, and this means that the austerity measures in Europe are going to have to be harsh. Greece are already facing civil unrest due to their cuts and taxes, while Spain have announced more cuts to civil servants pay, with a wage freeze next year, and a suspension of pensions plans some benefits. Just as in the UK, the spending cuts will provide a drag on growth, and this is hurting sentiment on the Euro, especially as yesterday's first estimate of growth in the Eurozone was just 0.2%. The Pound lost it's highs from early yesterday, but it has kept hold of a lot of it's recent gains keeping above 1.17.
Data has taken a back seat this week to the actions and formations of governments, and there is little today to change that with just the trade balance for the UK which has widened sharply, but is unlikely to have any effect on the Pound. There is an ECB monthly report, and some US fed officials giving speeches, but it looks like once again the markets will be turning their thoughts to the actions of the Eurozone nations, for which there was some good news yesterday as Portugal managed a debt auction successfully, although the fears that the ECB may start QE is likely to provide a drag on the Euro over the coming months.
Posted in Daily Market News on May 30 2014