Debt Fears Undermine Sterling

Daily Forex Fundamentals | Written by Investica | Apr 22 09 12:29 GMT |

The UK government deficit levels will continue to represent an extremely important medium-term risk factor for the UK currency. Countries with budget deficit levels above 10% of GDP run a very important risk of suffering a collapse in confidence. The degrees of risk appetite will also need to be watched very closely. If wider fear over the global economy increases again and stock markets start to suffer sharp losses, then there will be a much bigger risk of UK currency losses. Sterling, therefore, is still a leveraged play on the global economy. Overall, still look to sell the currency on rallies. The headline UK unemployment claimant count increase was lower than expected at 73,600 for March which will provide some slight relief given expectations that unemployment would increase by more than 100,000 for the month, but the government borrowing data was even worse than expected which will reinforce budget fears and the shortfall was GBP90bn for the year. The government announced an expected budget deficit of GBP175bn for the fiscal year starting in April with only a marginal decline the following year. Borrowing at this level would represent 12% of GDP and this assumes that the economy can start to stabilise before the end of 2009. Tax increases were also announced for the following year to help trim the deficit. Borrowing at these levels remains a very important risk factor for Sterling as the deficit is certainly at a level which could trigger heavy and aggressive selling pressure on the currency. Investica http://www.investica.co.uk Disclaimer: Investica's market analysis is not investment advice and must not be taken as recommending particular market positions. Investica can take no responsibility for any actions taken by investors.