Sterling hit by higher UK public borrowing

By Kenneth Broux, Senior Market Economist and Altaz Dagha, Strategist Corporate Markets

Sterling broke through key support levels this week, breaking lower out of its recent medium-term range and
falling to a nine-month low versus the US dollar.

Unexpectedly weak UK labour market data and higher than forecast UK January public borrowing sent GBP/
USD below 1.55. The US dollar was given an added boost by the Fed’s decision to raise the discount rate to 0.75%, also resulting in a nine-month low for EUR/USD which briefly traded below 1.35. The Australian dollar outperformed in the G-10 space over the week, gaining 0.8% versus the US dollar while EUR/GBP also ended the week higher, up 0.8% at 0.8771.

GBP/USD began the week fairly quietly, ranging between 1.56-1.57, little changed in the scheme of things following the UK CPI report and the release of the latest MPC minutes. Headline CPI inflation rose from 2.9% to 3.5%, triggering a letter from BoE governor King to the Chancellor. Although the rise was as expected and mainly down to base effects following the VAT hike, GBP/USD rose to an intra-week high of 1.58. The MPC have noted that they expect a further spike in inflation and that shorttem volatility must be looked through. The minutes revealed a unanimous vote to pause the quantitative easing programme but it was made clear that for some members, the decision was “finely balanced” and that further asset purchases were not ruled out should conditions warrant. It was the surprise increase in jobless claims following two months of falls that kicked off the sterling sell-off on Wednesday.

This was compounded by the public sector borrowing numbers which revealed a borrowing of £4.3bn in January, a month which has always previously produced a cash surplus. The report brought to the fore the worrying state of UK public finances and sent sterling tumbling. GPB/USD hit a low of 1.5357 before consolidating just above 1.54.

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* All charts are sourced to Lloyds TSB Corporate Markets Economic Research, Bloomberg, IMF and Datastream

 


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