Published: Wed, 22 Apr 2009 15:33:23 +0200

Increase in UK Public Spending Sends Sterling Lower

(CEP News) - Grim news from the UK government is weighing on sterling Wednesday morning. UK Chancellor of the Exchequer, Alistair Darling, said the government plans to borrow a record £703 billion over the next five years to support the faltering economy.

In his budget speech, Darling said he expects the UK economy to contract 3.5% in 2009 and show modest growth of 1.25% in 2010. The government said it would issue £220 billion in gilts in the fiscal year 2009-2010.

The weaker economic outlook and the increase in money supply is causing sterling to fall significantly against the U.S. dollar and the euro. GBP/USD is trading near 3-week lows hovering just above 1.44 USD.

EUR/GBP is trading at a 2-week high, perched in the mid 0.89 pence area.

Stephen Gallo, head of market analysis at Schneider FX, said Wednesday's budget brings home the reality that the UK economy is worse than expected. He added that while the UK government is doing everything it can to support the faltering economy, it is at the expense of longer term growth.

"Clearly the budget shows that the public finances are in horrible condition," he said. "There is going to be more strain on public finances in the short term."

Gallo said he is looking for sterling to continue to weaken against the U.S. dollar and is expecting the latest news to cause the cross to test the 1.43 level. "I would be looking to sell rallies at the 1.45 level," he said.

Neil Mellor, senior currency strategist from the Bank of New York Mellon, said that although Darling's speech was grim, it was relatively in line with expectations. He added that any selloff in sterling could be seen as a good buying opportunity.

"The speech was a confirmation of what is already known," he said. "I think the steps the UK government is taking is more proactive for the economy than what is happening in the euro zone."

Mello pointed out that EUR/GBP has not been able to hold sustained gains above 90 pence. He expects that level to continue to hold as major resistance in the short term.

The steps the UK government is taking in the short term will have longer term implication, but Mellor said the focus right now is on the global recession. In the long term, the increase in money supply could be negative for the euro.

Euro/USD up 0.47 cents to 1.2993

USD/CAD up 0.59 cents to 1.2417

USD/Yen down 1.05 points to 97.68

GBP/USD down 2.13 cents to 1.4461

AUD/USD down 0.72 cents to 0.7043

Euro/Yen down 0.88 points to 126.92

Euro/GBP up 1.64 pence to 0.8984

GBP/CAD down 1.72 cents to 1.7962

CAD/Yen down 1.23 points to 78.67

Euro/CAD up 1.37 cents to 1.6134

The U.S. Dollar Index is up 0.07 points to 86.61

All data taken at 9:31 a.m. EDT

By Neils Christensen, neilsc@economicnews.ca, edited by Stephen Huebl, shuebl@economicnews.ca