Debt, Politics, and More Rocks the Pound in 2010

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U.K. continues to worry about its deficit and exposure to Dubai

Debt woes from late 2009 continued to affect risk sentiment during the start of 2010, and weighed down higher-yielders such as the pound. Traders were reluctant to buy up those currencies whose economies are also in debt trouble. As of January, the U.K.’s debt-to-GDP ratio sat at 60.2%.

UK still stuck in recession for Q3, worries about stagflation

CPI figures revealed that inflation shot past the BOE‘s 2% target, as the headline figure printed a 2.9% annual increase while the core figure showed a 2.8% year-over-year rise. Since the U.K. was still suffering from negative economic growth and poor employment, this placed the economy in danger of stagflation. With this phenomenon, trying to solve one problem usually exacerbates the rest.

The final GDP report for the third quarter of 2009 revealed that the U.K. is still stuck in recession. This left the U.K. as the only G20 economy with negative quarterly economic growth. Components of the report showed that consumer spending was still weak, despite the holiday season.

Polls reveal greater possibility of a hung parliament

Early election polls hinted that none of the political parties would hold a majority of the seats in parliament. Such stalemate political situation would make it more difficult for the British parliament to pass legislation that would help solve their country’s economic problems.

UK elections end in coalition government

Fears of a hung parliament were realized, as the Conservative party was unable to secure enough number of seats to secure a majority. Because of this, the Conservatives tried to negotiate a coalition with the Liberal Democrat party. However, the Labor party was also trying to woo the Lib Dems into a coalition. In his attempt to keep the Labor party in power, Prime Minister Gordon Brown stepped down from office.

Andrew Sentence argues for BOE rate hike

Midway through the year, the BOE’s monetary policy committee members were no longer unanimous in their decision to keep rates on hold as Monetary Policy Committee member Andrew Sentance voted for a rate hike. He pointed to rising inflation as one reason to tighten monetary policy.

UK releases stronger-than-expected Q2 GDP

The preliminary GDP report showed that the U.K. economy grew twice as much as expected, printing a 1.1% expansion for the second quarter of the year. Still, BOE officials remained dovish as they weighed the impact of spending cuts on future growth.

Adam Posen proposes further QE for the U.K.

Minutes of the latest BOE policy meeting showed that central bank officials are becoming less dovish. Andrew Sentance continued to push for a rate hike, but was outvoted by the rest of the committee members. In fact, MPC member Adam Posen spoke about further easing for the U.K., which drove the pound down.

Debt woes revive the U.K.’s fiscal concerns

The U.K. banks’ exposure to foreign banks put them at risk of default. Their banking sector started to worry about refinancing, foreign bank exposure, and large sovereign debt.

So, what’s next for Cable?

There are too many questions without answers for us to gauge the probable direction for GBP/USD in 2011. Will there be further QE action to spur growth? Will we see rate hikes to fight inflation? Can debt be controlled? The list of questions go on and on, but as we always say, “anything can happen.” And regardless of what happens in 2011, I’ll be on top of it the best I can to help you make the best trading decisions you can. Stay tuned!

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