Sterling: fears increase as economic woes deepen
The pound could fall further this week on the back of a raft of gloomy data – as analysts warn that sterling's weakness could develop into a full-blown crisis.
By Angela Monaghan
Last Updated: 6:18AM GMT 15 Dec 2008
The pound is heading closer to parity against the euro, after closing at just €1.11 on Friday – the lowest it has been since the single currency was launched in 1999 and 17pc down on the beginning of the year when it was worth €1.34. It also fell to a record low against a basket of currencies.
Steve Barrow, currency strategist at Standard Bank said he was "fearful" for the pound which he believes could fall to parity against the euro in 2009.
If the pound weakens dramatically it could limit the ability of the Bank of England's Monetary Policy Committee to cut interest rates and push up the cost of imports.
Mr Barrow said that in the longer term the euro – rather than the pound – could face pressure because a deep recession in the Eurozone is likely to cause "considerable political friction" between its 15 members. (AtW's comment: Mr Barrow reminds me Hitler in his bunker saying how allies would be split due to different political views so their breakdown is imminent...)
However, in the shorter term UK data out this week including unemployment and retail sales figures are likely to add to the deteriorating economic picture and could put further pressure on the pound. Unemployment figures on Wednesday are expected to show that numbers rose sharply again in October.
Figures published by the Office for National Statistics tomorrow are also expected to show that consumer price inflation fell sharply in November to below 4pc, after the Consumer Prices Index fell to 4.5pc in October from a peak of 5.2pc in September. The retreat of inflationary pressures will give the MPC more room to cut interest rates. That expectation could also cause the pound to weaken.
The Bank of England Governor Mervyn King is expected to be forced to write another letter to the Chancellor this week explaining why inflation is more than 1pc above the over the 2pc target. (AtW's comment: maybe BoE Governor should get 20 lashes in front of the building and TV cameras instead of having to write this letter.)
The market will be looking for further guidance on the future path of interest rates when the minutes from the latest MPC meeting are published on Wednesday.
The pound's weakness was at the centre of a political spat yesterday, after the Chief Secretary to the Treasury Yvette Cooper said that the Government would not provide a "running commentary" on sterling or target exchange rates.
"We've never had a policy of targeting the pound. Our policy is to target inflation. And that I think has been the right one," she told the BBC's Andrew Marr programme. (AtW's comment: country with negative balance of payments will import inflation if currency falls you stupid bint!)
"If we don't step in to support the economy now and help people through this, it will cost us more in the future because we will see a recession which lasts longer, which runs deeper, which keeps unemployment higher for longer."
In response to her comments the Conservatives said that the Government itself was to blame for the pound's weakness.
"The Government says it will not "step in" as the pound slides to parity with the euro, but it is this Government's reckless intervention which has caused the pound's weakness," said Philip Hammond, Shadow Chief Secretary to the Treasury.
"Gordon Brown's huge borrowing programme which has been ridiculed by the Germans and cautioned against by the IMF and the European Central Bank, has now been firmly rejected by the markets, which have responded to Brown's economic policies by dumping sterling," he said.
The pound could fall further this week on the back of a raft of gloomy data – as analysts warn that sterling's weakness could develop into a full-blown crisis.
By Angela Monaghan
Last Updated: 6:18AM GMT 15 Dec 2008
The pound is heading closer to parity against the euro, after closing at just €1.11 on Friday – the lowest it has been since the single currency was launched in 1999 and 17pc down on the beginning of the year when it was worth €1.34. It also fell to a record low against a basket of currencies.
Steve Barrow, currency strategist at Standard Bank said he was "fearful" for the pound which he believes could fall to parity against the euro in 2009.
If the pound weakens dramatically it could limit the ability of the Bank of England's Monetary Policy Committee to cut interest rates and push up the cost of imports.
Mr Barrow said that in the longer term the euro – rather than the pound – could face pressure because a deep recession in the Eurozone is likely to cause "considerable political friction" between its 15 members. (AtW's comment: Mr Barrow reminds me Hitler in his bunker saying how allies would be split due to different political views so their breakdown is imminent...)
However, in the shorter term UK data out this week including unemployment and retail sales figures are likely to add to the deteriorating economic picture and could put further pressure on the pound. Unemployment figures on Wednesday are expected to show that numbers rose sharply again in October.
Figures published by the Office for National Statistics tomorrow are also expected to show that consumer price inflation fell sharply in November to below 4pc, after the Consumer Prices Index fell to 4.5pc in October from a peak of 5.2pc in September. The retreat of inflationary pressures will give the MPC more room to cut interest rates. That expectation could also cause the pound to weaken.
The Bank of England Governor Mervyn King is expected to be forced to write another letter to the Chancellor this week explaining why inflation is more than 1pc above the over the 2pc target. (AtW's comment: maybe BoE Governor should get 20 lashes in front of the building and TV cameras instead of having to write this letter.)
The market will be looking for further guidance on the future path of interest rates when the minutes from the latest MPC meeting are published on Wednesday.
The pound's weakness was at the centre of a political spat yesterday, after the Chief Secretary to the Treasury Yvette Cooper said that the Government would not provide a "running commentary" on sterling or target exchange rates.
"We've never had a policy of targeting the pound. Our policy is to target inflation. And that I think has been the right one," she told the BBC's Andrew Marr programme. (AtW's comment: country with negative balance of payments will import inflation if currency falls you stupid bint!)
"If we don't step in to support the economy now and help people through this, it will cost us more in the future because we will see a recession which lasts longer, which runs deeper, which keeps unemployment higher for longer."
In response to her comments the Conservatives said that the Government itself was to blame for the pound's weakness.
"The Government says it will not "step in" as the pound slides to parity with the euro, but it is this Government's reckless intervention which has caused the pound's weakness," said Philip Hammond, Shadow Chief Secretary to the Treasury.
"Gordon Brown's huge borrowing programme which has been ridiculed by the Germans and cautioned against by the IMF and the European Central Bank, has now been firmly rejected by the markets, which have responded to Brown's economic policies by dumping sterling," he said.
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