Dire Warning On UK Deficit From British Chancellor George Osborne Threatens GBP EUR Exchange Rate

Modified: Monday, 3 December 2012 09:10 BST - Written by Ben Hughes

STORY LINK Dire Warning On UK Deficit From British Chancellor George Osborne Threatens GBP EUR Exchange Rate

The weekend currency market close brought bad news for the Pound when British Chancellor George Osborne took to the airwaves ahead of his Autumn statement, which he is set to deliver to parliament on Wednesday. Osborne used a television interview yesterday to manage the expectations of market participants when he warned that cutting the UK’s government deficit, which still stands at over one trillion Pounds, is likely to take longer than had previously been anticipated. Osborne reiterated his promise to reduce the UK’s deficit as a percentage of the nation’s total GDP in the life of the current government, (i.e. the year 2015). It seems unlikely that such an unambitious aim will assuage market fears regarding Britain’s current fiscal position. However, as long as strong demand for UK gilts persists, then Britain’s policymakers will be able to service their nation’s historically high level of indebtedness. However, any hint that bond market participants are becoming less willing to hold British governmental debt will be likely to see the Pound give up ground against the other major global currencies.

Meanwhile, on the other side of the Atlantic, discussions between Democrat and Republican lawmakers aimed at averting the US economy’s impending ‘fiscal cliff’ do not appear to be making any significant progress. Yesterday’s comments from Republican House Speaker John Boehner, one of his party’s most senior figures, describing the talks as going ‘nowhere’, have not helped in alleviating the pall of doom in the States regarding the issue. Boehner added to the mood of despondency when he described himself as being ‘flabbergasted’ when hard-line Treasury Secretary Timothy Geithner presented the White House’s proposal for avoiding potentially catastrophic domestic tax hikes and spending cuts before the end of the year. The GBP USD exchange rate opened the week still in the 1.6000s at the start of last night’s Asian session. However, the potential for significant downside exists for the pair as Christmas approaches should American policymakers fail to reach an agreement. If such a scenario triggers a flight to safety from institutional investors, then expect the Pound to register gains against the high-yielding Australian and New Zealand Dollars.

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