Sterling Under Pressure As Debt Concerns Grow

Sterling Under Pressure As Debt Concerns Grow

The pound sterling is under some pressure at the start of the week, following concerns from some key economists over the government's debt reduction programs, along with another ripple of concerns from Dubai World.


In a letter addressed to the Sunday Times on Monday, 20 influential UK economists including some of the BOE's Monetary Policy Board said the UK's debt reduction program lacks urgency and that the country should attempt to eliminate the country's deficit within five years.

However, government officials continue to press the fact that the time is not yet right to withdraw some of the simulative policies adopted to fight the financial crisis.

Responding to the letter in an interview with BBC Radio 4, UK Chancellor of the Exchequer Alistair Darling says he disagrees with the needs to cut the deficit more quickly for fear of snuffing out the beginnings of an economic recovery in the region.

The implications for FX are mixed. Essentially, faster budget cuts in the UK would in theory help the currency's credibility and strengthen the pound, particularly in the short term.

That being said, if Darling is correct that cutting the deficit could send the UK into another recession, the longer term prospects on the pound could be weakened.

Also weighing on the pound is a report that investors of Dubai World could face losses after all. Earlier on Monday, sources told Dow Jones Newswires that Dubai is looking at a plan to repay lenders 60% of investments over the next seven years.

Although the government has publicly denied the report, the comments are said to be weighing on sterling given the exposure of the British Banks to the Middle East.

Nevertheless, the moves have not been very drastic, and the pound was only lower by 38 pips at 1.5662 shortly after the North American markets would have opened if not for public holidays in the U.S. and Canada.

So far, the pair has traded in a range of 1.5613 to 1.5692. Short term resistance lies at 1.5765 with support at 1.5613.

Meanwhile, EUR/GBP is down 40 pips at 0.86761 after trading in a range of 0.86707 to 0.87029 today. Short term resistance lies at 0.88416 with support at 0.86580.