Following an early sell off cable bounced off the USD/GBP1.5760 level as sterling sentiment was lifted by comments from the OECD’s Secretary General Gurria that S&P’s downgrade to its UK debt outlook was inexplicable. The volatility in sterling over the past 24 hours or so describes the confusion in the market as to the extent of the bad news with respect to the UK national debt. While the outlook is indeed sour most investors do not suspect that the UK government is anywhere close to being at risk of defaulting on its debt obligations; though clearly budgetary restraint will have to be displayed by government going forward. While the budget outlook is a significant concern, this is not new news. Crushed by bad news on the UK financial system and national accounts, the pound is still about 30% weaker vs the EUR relative to its pre-Northern Rock levels and about 20% softer vs the USD. With so much bad news still in the price, it is likely that the pound will remain sensitive to good news going forward. Yesterdays’ news from S&P on UK debt completely overshadowed the announcement from Spanish bank Caja Madrid that it would skip a bond interest payment due to subprime related problems at home. With Spanish unemployment at 17.7% and rising it is not surprising than the level of domestic bad debts are rising. It is possible that more bad news will emerge from Eurozone banks during the summer, a factor which would like put further downside pressure on EUR/GBP. Sterling was largely unresponsive to this morning’s second estimate of Q1 GDP. The estimate remains at -1.9% q/q. Full text »
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