Sterling exchange rates fall

The pound has lost ground across the board this morning, and is down 0.8% vs. the euro and 0.4% against the USD, following yesterday’s austerity measures and Bank of England minutes.


The increased chance of quantitative easing (QE) appears to be the main driver for this fall at present. The BoE minutes shwed that a higher numbers of the members that vote for or aginst QE want to extend the programme to inject money into the economy. This type of news is bad for sterling exchange rates becuase QE increases the supply of money (pounds) in the economy, and an increase in supply as a general rule leads to a fall in value.  The last time we saw QE in the UK the pound fell aginst most major currencies by an average of 4%.

Looking at the austerity measures, the spending review hasn’t really given us a great deal of detail as the chancellor stated that this information will be released over the coming days and will be eagerly anticipated as we see where the estimated half a million job losses will be.

An overview of the main cuts and announcements is detailed below:

-Structural deficit to be eliminated by 2015
-Approximately 490,000 public sector jobs likely to be lost
-Average 19% four-year cut in departmental budgets
-£7bn in additional welfare budget cuts
-Police funding cut by 4% a year
-Retirement age to rise from 65 to 66 by 2020
-English schools budget protected
-£2bn extra for social care
-NHS budget in England to rise every year until 2015
-Regulated rail fares to rise 3% above inflation
-Bank levy to be made permanent

Those analysts who oppose these deep cuts so soon after the UK has recovered from recession, beleive the economy is not able to take sucg a big hit.  It is feared that this will send the economy back into recession. At present it’s more opinion than anything else, which makes it difficult to assess how the pound will fare in the future. Ultimately the reduction in spending should help the economy, but if we do head back into recession the timescales for recovery will be much further into the future.

It is possible to look at things in a slightly more positive way.  If the unemployment casued by the austerity measures is absorbed by the private sector the economy may not suffer as much as some predict. This could result in slow but sustained eoconomic growth and could see the pound making gains in the medium term against most major currencies.

Ultimately the future exchange rate movement for sterling is very uncertain at present, even more so than normal. I think overal we are likely to see sterling weakness in the next 1-3 months, but I do anticipate some volatility as I have a feeling the market will be reacticing excessively to data releases. That is to say I think we will see overreactions. Good news will cause the pound to gain beyond appropriate levels where as bad news will casue losses of the same nature.

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To contact the author just email ajm@currencies.co.uk / call 01494 787 478 and quote AJM Blog GBP Sterling USD Dollar EUR Euro NZD Kiwi AUD Aussie DKK Krona CAD Loonie CHF Swiss ZAR Rand THB Baht HKD Dollar CZK Krona TRY Lira SEK Krona NOK Krona