UK’s Proposed Spending Cuts Could Mean Bad News for the Pound

UK Prime Minister David Cameron has paved the way for ‘painful cuts ahead that will be unavoidably tough’, with details in the emergency Budget on 22 June. The impact of any proposed measures has raised concerns about the prospects for the UK economy, particularly considering the fragile nature of the recovery. This could have a distinct effect on sterling as investors show caution against buying into the currency.

“The pound’s rally against the euro could come to an abrupt halt should the spending cuts prove to be too much too soon. The government needs to find a fine balance: one that sufficiently appeases the market’s desire to see the deficit cut, but falls short of strangling the fledgling recovery,” said Duncan Higgins, senior analyst at Caxton FX.

So where does this leave sterling over the longer-term?

“Through the summer, we expect to see sterling’s rally against the euro continue, albeit at a more gradual pace than we have seen recently. Fears about the eurozone banking crisis are failing to subside and investors will be inclined to continue selling the currency, particularly as most eurozone officials seem apathetic, even content, with the euro’s slide,” said Higgins.

“Into the longer term sterling’s strength could be undermined as the UK’s economic figures begin to reflect the spending cuts. April’s Budget forecast for economic growth in 2010 and 2011 could well prove to be optimistic in light of new government policy. The Bank of England, in order to shield the economy against the cuts, will also be far less inclined to raise interest rates, seeing an increased pressure on sterling,” he added.


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