YB Currency Update – Monday 21st September

YB Currency Update – Monday 21st September

The news this morning is full of the dire state of public finances, not about how bad they are, as that now seems to be a given, but how they are to be dragged back from them mire. For once Labour seem to realise that they will have little influence over public finances after next year, so the current debate is with the Lib Dems, the Tories and the CBI. The Lib Dems have weighed in with proposed tax rises for those with houses valued at over GBP1m, hitting those in the South East where house values are highest, and are actually rising while they still fall in the most of the rest of the country, according to this morning's Rightmove report; while the CBI have proposed cutting grants, increasing fees, and raising interest rates on student loans, as a way to fund university places, which they also say should not be expanded to take in 50% of all school leavers. It is true that the current council tax banding does instigate a flat tax on the upper reaches of the house prices, and that expanding the numbers going to university is an expensive business, and will inevitably drag down quality, but the current debate shows how the whole debate has flipped and Labour's previous tactic of pointing to the conservatives as the party of cuts, which has served them well, is more likely to hurt Labour than the Tories.

Last week showed public spending rising to another record high, which was a factor in the Pound's slide on Friday, although market moves, as Traders sought to take profit on recent rallies, also helped pull the Pound down below 1.11 against the Euro. Comments from the BoE that Sterling's long run effective exchange rate may have permanently taken a shift lower to take in a risk premium due to the imbalances in the UK economy, and how these have been reported in the weekend's press has weighed on the Pound further, not helped by thin trading in the Far East as Japan and Singapore take one of their many public holidays. This week is likely to see the Pound on the defensive with the BoE MPC minutes released on Wednesday, but Sterling may recover towards the end of the week with the Q2 GDP figures likely to be revised higher.

The Pound has also slipped against the Dollar, partly on the same factors that have forced it lower against the Euro, but also down to the Dollar rising as traders take profit on it's recent fall. The Pound has slipped  from up near 1.68 just over a week ago, to below 1.6150 this morning, while the Euro has fallen over a cent, down from 1.4750. The Dollar is likely to have only a limited rally ahead of this weeks FOMC decision, although if traders continue to take profit on their currency trades and equity gains, the Dollar shouldn't fall too far.

Apart from this morning's Rightmove report, which showed a slight rise, although that was only in three regions, with house prices falling elsewhere, so the UK will be waiting for Wednesday's BoE minutes, the FOMC meeting, and the Q2 revision at the end of the week, to give the Pound some direction.

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