Sterling expected to keep falling in 2010 in run up to UK general election amid hung parliament concerns

by Ray Clancy on January 7, 2010

costoflivingUKSterling’s credibility is being stretched by the ballooning UK budget deficit and fears of a hung  parliament at the general election, according to currency experts. There is a wide consensus that the pound will resume its slide in 2010 after making a small gain in 2009.

The latest meeting of the Bank of England today (Thursday January 07) is expected keep interest rates on hold at 0.5%, with no change to the quantitative easing package. The Pound continued to decline against the major currencies at the beginning of this week as concerns persist that the UK budget deficit is widening to record levels and may threaten the country’s Aaa credit rating.

The Bank of England is due to re-assess its quantative easing plan in February. ‘While most central banks are already talking about exit strategies, the Bank of England is still talking about extending asset purchases. It seems that it’s behind the curve and that’s not a good environment for the Pound. I expect it to stay under pressure for the next month,’ said Lutz Karpowitz, a currency strategist at Commerzbank AG.

Rumours of a potential call for a secret ballot to oust UK Prime Minister Gordon Brown are adding to the pressure. ‘This further weakens the UK’s standing in the eyes of the financial community and through that they have punished the Pound,’ said Jeremy Cook, chief economist at foreign exchange broker, World First. Rumours are also swirling through the market that we as a country have no unified plan to deal with the UK’s dire fiscal position and this further shows that the powers that be are in disarray.

At the time when the pound needed cohesion from its government, it got confusion. If this carries on sterling will continue to be the markets’ rag-doll,’ he added. The Pound has also declined on the back of Brown and the Opposition leader David Cameron firing the opening salvos in the election campaign, attacking each other’s credibility over plans to cut the budget deficit. Should any one party fail to win a majority and a hung parliament is declared, the UK currency would decline exponentially, according to experts.

The Pound may be shaping up as a bit of a basket case heading into the election around the middle of the year. Recent policy announcements by the government reek of desperation. We have probably not heard the last of this policy choice and others may arise to gain popular vote but at the risk to damaging the long-term health of the economy,’ said Gregg Gibbs, a currency strategist at Royal Bank of Scotland Group.

According to Gaitame.com Research Institute, the Pound is poised to breach a threshold that may herald a further drop against the Dollar towards the $1.57 level and possibly lower.

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