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The Pound has continued its upwards momentum against the Euro yesterday, rising to a high of 1.2176 in early trading, despite comments from the Prime Minister David Cameron, who seems to be preparing voters for the deepest public spending cuts since Margaret Thatcher's reign. The Chancellor of the Exchequer George Osborne is due to deliver his emergency budget on the 22nd June and Cameron's comments yesterday will spark concern that the black hole in UK public finances will require severe spending cuts.


Cameron said in a speech yesterday that "the overall scale of the problem is even worse than we thought." The Prime Minister is seeking public backing for cuts that will be the steepest since the 1980s, as he lays ground for the June 22nd budget in which the Chancellor is set to unveil reductions needed to reduce the deficit, which has expanded to 11.1% of GDP, the most among the Group of Seven nations.

The fact that the Pound has continued gaining versus the single currency perfectly illustrates the inherent weakness in the Euro, which has also fallen under $1.20 versus the Dollar to the lowest level in four years. European stocks have fallen again this morning, while the FTSE 100 Index has also retreated, amid escalating concern that the sovereign debt crisis engulfing much of Europe will spread and slow the global economic recovery.

Asian stocks also slumped and U.S futures fluctuated, after the non-farm payrolls data on Friday disappointed investors and prompted speculation that the U.S economy may be heading towards a slowdown, amid faltering government support and persistently higher unemployment. The economy rebounded strongly from the worst financial crisis since the Great Depression in the fourth quarter of 2009 but the risks to the recovery are growing, as the debt crisis in Europe escalates.

The Pound was up 0.3% against the Dollar by the close of trading last night at $1.4490, leaving its decline since the start of the year at 10%. The FTSE 100 Index also closed 1.2% lower last night and the decline in global stocks will strengthen the lower yielding currencies like the Japanese Yen and U.S Dollar, as investors look to hedge against risk.

Neil Mellor, a currency strategist at Bank of New York Mellon Corp, said that gains by the Pound will prove to be a "temporary correction" and the UK currency is still "lower than where we were through the course of last week." Analysts at Bank of Tokyo-Mitsubishi UFJ Ltd have advised investors to buy currencies considered to be the safest because the global recovery will slow as governments focus on budget cuts.

Lee Hardman, a foreign exchange strategist at the bank said that "escalating global sovereign debt concerns are prompting governments globally to re-focus attention on fiscal consolidation, diverting attention away from supporting global growth. We continue to prefer remaining defensively positioned safe haven currencies such as the Yen, Dollar, and Swiss Franc."

Risk sentiment will remain the primary driver of the foreign exchange market today and a tentitative rally in stocks could help push the Pound back above $1.45 against the Dollar, before renewed selling later in the U.S session as equity markets come under further pressure. The UK currency has strengthened to a fresh 18-month high against the Euro, coming close to the significant 1.2195 level.

EUR/USD

The Euro slumped to a fresh four-year low against the U.S Dollar yesterday, as the slump in global stock markets and the sovereign debt crisis in Europe raised concern about the sustainability of the global economic recovery. The single currency also fell to an 8-year low against the Japanese Yen, as investors flocked to the relative security of lower-yielding assets.

The Euro declined even as a report from Germany showed that factory orders unexpectedly increased for a second month in April, driven largely by a weaker Euro that has fueled demand for exports. Orders rose 2.8% from March, when they surged 5.1%, as the debt crisis in Europe pushed the single currency down 20% against the Dollar in just six months.

John Doyle, a strategist at currency-trading firm Tempus Consulting Inc, said that "the data was not enough to prop up the euro. Until the European debt crisis cools somewhat, the data will continue to be overlooked. Every time you see stocks fall, people are shedding riskier assets." The Euro dropped 0.4% against the Dollar on the day to 1.1923, the weakest level since March 2006.

Market Analysis by Adam Solomon

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