The pound opened down at the start of the trading week against the majority of the 16 most actively traded currencies as the IMF gave a ‘thumbs up’ to the government’s austerity measures putting paid to recent speculation that the austerity measures could be relaxed in an effort to accelerate the economic recovery in the UK.
The IMF reported that the UK economic recovery is likely to remain muted in coming months but added that in its opinion, the UK government should stick to its current deficit-cutting plans. The soft housing market and the effects of fiscal consolidation will continue to weigh on UK growth after a flat 6 months to 31 March, the IMF predicted, adding that inflation is likely to remain above 4% for most of 2011. The IMF’s support for the government’s policy is based partly on the perception that inflation will gradually move towards the government’s 2% target in coming months.
“Although consolidation will create headwinds for short-term growth, it will also assist disinflation and can thus be countered by looser monetary policy than otherwise,” the IMF said.
As if to underline current difficulties, the British Retail Council (BRC) reported this morning that UK May retail sales were down by 2.1% on a like-for-like basis from the same month last year demonstrating the fragility of consumer sentiment in Britain. The drop in sales comes after a strong rise in April that was boosted by warm weather and a string of bank holidays including the royal wedding.
The euro benefited not only from pound weakness but from the decisive poll result in Portugal’s general election at the weekend.
The dollar index, which tracks the US dollar against a basket of currencies, rose to 73.970 following the heavy falls seen in late Friday trading after the publication of much worse than expected US non-farm payrolls, the key employment data from the US.
The pound fell to a one month low against the euro and the euro rose 0.3% at 89.35p in late trading. In an analysis note out this morning, economists at Citi have indicated that they expect that, “The ECB is likely to leave the main refinancing rate unchanged at 1.25% in June. But, by using the phrase “strong vigilance”, we expect the ECB to prepare for the next rate hike of 0.25% in July.”
The one bright note yesterday for the pound was against the Canadian dollar after a further fall in world oil prices allowed the pound to squeeze up to end close to a 3 month high.
Commentary by Tony Redondo
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