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Weakness in the Pound Quickly & Simply Explained

March 2nd, 2010 Michael McDonough

Several weeks ago Fitch warned that out of all Europe’s AAA rated sovereigns the UK was the most vulnerable to lose this rating. But, most analysts believe this would not be an issue as the government would implement austere fiscal policies reigning in large deficits and a growing debt load. Such policies do not come without political backlash, which is why a fear of no majority in the British Parliament is raising concerns that Britain will be unable to enact the necessary policies to stabilize spending. As you can see from the falling pound these risks are now being priced into the market, and trading will likely be volatile until the market receives a clearer picture of the upcoming elections, and whether or not parliament will be able to make these tough decisions without a majority if this does occur. The UK is no stranger to financial strife. In 1976 the UK received a loan from the IMF on the back of concerns over its debt and large budget deficits.

UK Budget Deficit (% of GDP)

Source: Bloomberg

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