Sterling gained against US$ as spending cuts outlined

Published: 21 October, 2010

Sterling gained against the US dollar yesterday as George Osborne outlined plans for UK spending cuts but it fell against the euro as the Bank of England minutes showed one member voting for further Quantitative Easing.

Currency Rates
EURO/GBP - 1.129
US$/GBP - 1.575
CHF/GBP - 1.523
CAN$/GBP - 1.610
AUS$/GBP - 1.604
ZAR/GBP - 10.920
JPY/GBP - 127.83
HKD/GBP - 12.232
NZD/GBP - 2.102
US$/EURO - 1.395
HUF/GBP - 310.97

With plans for job losses, cuts to the welfare state and an increase in the retirement age, investors were encouraged by the government's aggressive approach to cutting spending and fighting the budget deficit, sterling gained against the US dollar - hitting a high of $1.5875/£1. In a similar vein to what was seen after the election and the emergency budget, the markets gave the government a rubber stamp of approval for their plans. Against the euro, sterling went the other way hitting a low of €1.1339/£1 over concerns that further Quantitative Easing (QE) was on the way following the Bank minutes. Overall though, most of the damage has been done already in the run up to today and it was not as bad as many had predicted. Out today, there is retail sales data and Adam Posen (the Monetary Policy Committee member that advocated further QE) speaks in Vienna.

In the Euro zone, German wholesale inflation data came in 0.1% better than expected, showing a 0.3% rise on the month. This helped boost the euro, alongside the relatively downbeat Bank of England minutes which contrasted sharply with their European counterparts who recently were a lot more upbeat about European monetary policy, with European Central Bank board member Juergen Stark quoted saying that the ECB may raise interest rates.

In the USA, the US dollar was widely sold against other currencies yesterday as a report by a leading consultancy reported that the Federal Reserve planned to buy $500bn of debt to help stimulate the US economy. This saw the US dollar drop nearly 1% against the euro and sterling. The US dollar hit a 15 year low against the Japanese yen below 81 yen, which could potentially see further intervention by the Japanese government.

Elsewhere, the Australian dollar jumped by 2% against the US dollar as it rebounded from yesterday's drop following the US report. In addition, ahead of this weekend's G20 meeting in South Korea, currency is likely to be top of the agenda with the US government looking to ensure that currency values are set by the free market and not by 'pegging' (i.e. fixing the rate against the US dollar). Many countries (China being the main example) do this in order to maintain a weak currency and cheap exports, despite large flows of money that would otherwise see the currency strengthen and export prices rise. This is a key issue for the US, as US exporters are artificially priced out of the market which is having an impact on US GDP.

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