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UK austerity budget boosts pound sentiment

Source: Reuters - Thu 8th Jul 2010

In the first Reuters survey of around 60 forex analysts since the new government's emergency budget, median forecasts showed the pound dipping from around $1.51 now to $1.46 in six months, before recovering to $1.49 in 12 months.

Last month's poll, conducted the week before the June 10 budget, saw the pound flat at $1.45 across the one-year outlook.

While respondents were still pessimistic about sterling regaining any strength from now, Wednesday's poll was the first this year to show an upwardly revised outlook for the UK currency.

New Chancellor George Osborne's budget was one of the toughest in generations, designed to tackle Britain's worst peace-time budget deficit with heavy spending cuts and increased sales taxes.

"The strong UK emergency budget has restored confidence and dismissed speculation about a possible UK (credit rating) downgrade," said Roberto Mialich of UniCredit MIB.

But whatever the positive implications of the budget for sterling, worrying signs of weakness ahead for the world economy were also at the forefront of forecasters' concerns.

Forward-looking indicators like purchasing managers indexes and sentiment surveys point to a marked slowdown in growth in major world economies in coming quarters as austerity measures kick in.


Reflecting such heightened uncertainty, the range of forecasts for the 12-month outlook widened from 43 cents in June to 47 cents in the latest poll.

"It is a big question whether the austerity plan will derail the recovery," said Niels Christensen of Nordea.

"Data releases in the near future will be a big test for sterling as the big theme on FX markets turn towards the sustainability of the economic recovery in an environment where fiscal tightening is high on the political agenda."

Washington policymakers like U.S. Treasury Secretary Timothy Geithner warned last month that big European states risk a return to recession if they were to cut spending too hard and too fast.

Forex strategists upgraded their forecasts for the pound against the euro, according to cross rates calculated by Reuters.

They saw the euro weakening through the year to 82 pence in three months, 81 pence in six months and 80 pence in 12 months, down from around 83.2 pence on Wednesday.

"The outlook for sterling, particularly against the euro, has improved further," said Meng Jiao of Bank of America-Merrill Lynch.

"The emergency budget ... forecasts an elimination of the UK's structural deficit by 2015, largely removing concerns that the UK may soon lose its AAA sovereign debt rating. To reflect this we have lowered our EUR-GBP forecast."

The British economy is expected to fare better than the euro zone's, growing 1.1 percent this year and 2.1 percent next, outstripping forecasts for 1.0 and 1.5 percent growth respectively in the 16-nation bloc.

The latest poll also revealed an expectation that cable trade would be slightly less volatile this month, based on calculations derived from the standard deviation of forecasts.

It implied annualised sterling volatility easing to 9 percent in July, from 10.9 percent in June.

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