January Spending Gap Hurts Sterling
February 25th, 2010
Jump in UK inflation is a ‘temporary deviation’. Greek prime minister likens his economy to the Titanic.
Having set off from €1.15 the pound fluctuated between €1.14 and €1.1550 until the middle of the week. On Thursday it took a dive, which was extended on Friday. It opened in London this morning off its lows – but only just – at €1.1350.
The week got off to a slow start with bank holidays in Switzerland, Canada and the United States. The lunar new year put China and much of the Far East on a go-slow for several days.
Things started to become interesting for sterling on Tuesday with January’s consumer price index data. As most analysts had predicted – and the Bank of England had warned – CPI inflation jumped from 2.9% to 3.5%, appreciably above the Bank’s 1%-3% target range.
In the Governor’s compulsory open letter to the chancellor he called it a ‘temporary deviation’ and repeated his belief that ‘weakness in spending… will bear down on inflationary pressures over time.’
If that was the good news, the bad news on Thursday was that the Treasury had had to borrow £4.2 billion in January. The Treasury never has to borrow money in January; that’s when a big chunk of the annual tax revenue comes in.
The Times summed up the situation as ‘On borrowed time: shock deficit threatens UK recovery.’ January’s retail sales figures, released on Friday morning, were no help to sterling either. The -1.8% monthly decline was a surprise to forecasters, as was the downward revision which showed sales falling in December as well.
An interesting debate in the press showed how opinion is divided about what course of action the government should take to bring its budget deficit back into line. The Sunday Times printed a letter from 20 respected economists highlighting the dangers of Downing Street doing nothing.
Friday’s Financial Times carried a response from 60 other, equally well-respected, economists saying that nothing is a very good thing to do until the economy gets back on its feet. Although disagreement among economists is nothing new, the exchange of views highlighted Downing Street’s dilemma.
Finding itself in a state of anxiety fatigue after weeks of angst about the difficulties of the debt situation in Athens, the market came to the conclusion that Greece was not about to be lost with all hands. It did so despite new revelations that the previous government had arranged swap trades with about 15 investment banks to hide (it is alleged) the size of its deficit.
Investors also managed to ignore some unfortunate sound-bites from Greek prime minister Papandreou. On one occasion he said that ‘we are trying to change the course of the Titanic; it cannot be done in a day’; an unfortunate simile. At the weekend he said he was not looking for a bailout because ‘our borrowing needs are covered until mid-March’, not exactly far away on the calendar.
He elaborated by explaining that ‘we need the help so that we can borrow at the same rate as other countries, not at high rates which in fact undermine our possibility for making the changes and cutting down our deficit.’ In other words Greece is not asking for actual cash but it is looking for guarantees that will allow it to borrow in the market. Basically, Greece wants the use of France and Germany’s credit cards.
After three months spent between €1.09 and €1.13 the pound is clinging to a slightly higher range, between €1.13 and €1.16, despite last week’s unhelpful news. Although its profile is now a little lower, the Greek albatross remains a burden, balancing investors’ slightly different worries about Britain’s political and financial situation. Buyers of the euro should take advantage of any spikes to hedge 50% of their exposure.
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