Monday 21st July 2008

Sterling starts the week on the back foot…

The pound was in decline on Friday following a report in the FT that the UK Treasury is considering a change its fiscal rules that would allow the government to increase borrowing to mitigate the effects of the slow down in the economy. Ironic then that this story broke on the same day that official figures showed that the public sector net borrowing in the first quarter of the financial year reached a record £28.2 billion - almost £10 billion above what it was in the same period last year. Net debt now stands at 38.3% of GDP just short of the 40% limit currently set.

Also weighing on sterling were comments from John Gieve, Deputy Governor of the Bank of England and MPC member who said the bank needed to balance the prospects of slowing growth and rising unemployment with rising inflation. He also said he could not rule out a recession. GBP/USD opened this morning at 1.9950 but in early trading has already dipped to 1.9908. GBP/EUR is also down from Friday’s close currently trading at 1.2555. Throwing in his tenpenneth this morning has been fellow MPC member and arch dove David Blanchflower. He was reported in the Guardian saying that the British economy is heading into recession and interest rates should be cut well below the current 5%.

Gains for the Dollar were limited on Friday by ongoing concerns over the financial sector. On Thursday Merrill Lynch reported weaker than expected second quarter results posting a loss of US$5 billion twice as much as analysts forecast and on Friday Citigroup announced a US$2.5 billion loss, albeit smaller than expected despite further write downs of US$11.7 billion. Other banks due to report this week are Bank of America (today) and Wachovia Bank (Tuesday).

The Euro was also hamstrung by comments reported on Friday from ECB president Jean-Claude Trichet that euro zone growth will be week in the second and third quarter before staging a recovery. EUR/USD starts this week pretty much where it finished on Friday at 1.5860.

Starting with the minutes of the July MPC policy meeting due out on Wednesday all the key economic data is published in the second half of the week including UK retail sales and US existing home sales on Thursday and UK GDP and US new home sales on Friday but more on these as we progress through the week.

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