Sterling softer but stable post-Budget

David Lamb, Head of Treasury Services at No1 Currency: Sterling weakened across the board in the immediate aftermath of yesterday’s budget but is currently trading off its lows. An over optimistic growth outlook for next year, almost instantly contradicted by the IMF, and an increase in gilt issuance to fund government borrowing were the main factors behind a 1.5% fall against both the US dollar and euro early yesterday afternoon.

Overall, markets remain driven by risk sentiment which has seen the pound fall from a little over US$ 1.50 a week ago to current levels around $1.45 as the dollar once again benefits from its safe haven status. Ongoing ‘stress tests’ on large US financial institutions along with continuing concern over their exposure to the auto sector has been behind this latest bout of risk aversion.

While the UK’s woes were highlighted in yesterday’s Budget, the EZ has not escaped from the grip of global recession with the IMF yesterday downwardly revising growth forecasts for this year and next along similar lines to those in the UK. This should ensure sterling remains underpinned against the single currency with the majority of bad news for the UK economy already priced into the market.