U.K. Economy Under More Pressure
Written by A Forex View From Afar on Monday, April 06, 2009The pound starts the week underperforming the major currencies, after failing to break above the 1.4950 resistance level. The pair failed two other tests in January and February, the present one being the third in-line. In the mean time, the pound’s decline triggered the TheLFB-Forex.com Trade Plan short numbers, gaining traders 100 pips with practically no draw-down.
During Monday’s session, the pound plunged 0.96%, considerably more than the other major pairs. The pound rose 0.8% during the Asian session, but these gains were easily reversed during the U.S. session, as the market re-entered in a risk-aversion mode. Currently, the pound has formed a bearish engulfing pattern on the daily chart, as it bounced off the 1.4950 swing area.
The pound’s decline comes as a number of voices were raised about the U.K.’s ability to fund its budget deficit. According to the latest forecasts, the U.K. government might be facing a 10% deficit this year, the biggest among the developed countries. To make things worse, the Institute for Fiscal Studies said that the government will have to raise the income tax by 8 percent, to bring the government budget to a more normal stance by 2015-2016, something that is very unlikely to happen. Previously, the BoE governor, Mervyn King, also complained about the poor state of the U.K.’s borrowing market.
TheLFB-Forex.com Trade Team notes that the BoE will be forced to intervene in the primary bond market, by buying gilts unsold to private investors. This will embark the BoE on a true quantitative easing policy, unlike the current policy that now involves only buying corporate bonds. “On the medium to long term, most likely, the pound will be a certain victim of the huge U.K. deficit, since the central bank will have to print money to bring the yields down” TheLFB-Forex.com Trade Team said. “The U.K. economy and pound will suffer even more if the global downturn intensifies, since it will force the government to borrow more”
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