Osborne cuts growth forecasts for UK as Eurozone continues to head towards break up

Tom Tong30/Nov/2011Currency Updates

GBP

Sterling held firm against the dollar on Tuesday, with most of the bearish news from finance minister George Osborne’s autumn statement already factored in, and month-end rebalancing flows into the UK offering support. “The austerity measures mean that sterling will continue to be supported as a safe-haven alternative. While prospects of QE next year will not see it rising, it will not fall much either.” said Simon Derrick, head of currency research at Bank of New York Mellon.

George Osborne said slower than expected growth meant it would take longer to wipe out Britain’s budget deficit, meaning tough austerity measures will extend beyond the next election in 2015. That is likely to underpin the country’s triple-A rating and encourage more flows into safe-haven UK gilts, in turn this is likely to support the pound.The crisis in the euro area affects the UK currency through two opposing channels — rising risk aversion that hurts all European currencies versus the U.S. dollar, and the increased safe-haven status of the UK within Europe.

EUR

The European finance ministers meeting failed to stem fears that the euro is hurtling towards a breakup. They agreed that there was a greater role for the IMF to play in fighting the debt crisis but Jean Claude Juncker said afterwards that plans to expand the rescue fund to 1tn euros is unlikely to be hit. In conclusion, they seemed to have passed on the more difficult issues to the EU leaders who meet next week. Hopefully President Obama’s call for bold action may spurn plans to contain the debt crisis, but until then, the source of the rescue fund is hard to find. With the US and China not keen to fill the breach, they see this as a European problem requiring a European solution.

USD

Yesterday, USD fell across the board as commodity currencies continue to rise, coupled with the surprise rise in consumer confidence reinforcing the currency’s status as the go-to safe haven. G10 currencies changed little against the Dollar in overnight trade, with markets digesting news flow from the first day of the Eurozone finance ministers’ summit taking place in Brussels. Hedge funds are continuing to get hammered on currency trading as a tumultuous 2011 winds down, according to a widely followed performance index. Currency-focused hedge funds dropped 1.33% in October, bringing losses over the last 12 months to over 3%. The funds lagged the nearly 6% gain in the Standard & Poor’s 500-stock index over the same period. Today, we are expecting to see an improvement in the pending home sales data released from the last figure.

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Written by Tom Tong

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