Welcome to the Pure FX account of what’s affected the exchange rates over the weekend.
Go for growth! The pound has climbed across the board over the weekend, as the UK government announces a raft of measures intended to get Britain growing again. Sterling’s gains include half a cent against the euro, taking it to its highest position against the embattled common currency since October 2008.
The most important part of the government announcements is an £80bn “Funding for Lending” scheme. Here, banks can borrow from the government at lower costs than they can from the international market, in exchange for boosting their lending to businesses and consumers. The more lending the banks do, the cheaper they can borrow.
The scheme is intended to address one of the biggest impediments to growth since the financial crisis i.e. the accusation that banks have been starving businesses of credit, because they’re more concerned with strengthening their balance sheets.
Will it work? Reception on the whole has been positive to date (hence the rising pound), suggesting it might. However some are sceptical. Howard Archer at IHS Global Insight for instance notes: “it may be that businesses and households actually don’t want to borrow any more in such an uncertain and worrying environment.”
We’ll find out if “Funding for Lending” has worked in the next 18 months, at which point it could further boost the pound.
What happens next for the pound?
The effort to boost growth aside, the biggest headwind facing the UK (and pound) at the minute is the strength of the Coalition. Last week, Conservative MPs led a rebellion against a Lib Dem-spearheaded motion to reform the House of Lords, and move it to a mostly elected format.
Regardless of whether the reform was wise or not (I personally oppose it), it was nonetheless a principle plank of the Coalition agreement, and its being side-lined hence threatens to undo the present government.
In fact, some Conservative MPs seem to welcome this development, implying that David Cameron has been neutered by the need to appeal to the Lib Dems.
Speaking of a Coalition breakup, Graham Brady, chairman of the 1922 committee, told BBC Radio 4 over the weekend, “It would be logical and sensible for both parties to be able to present separate vision to public” before the next election, adding “Of course, it is always possible that that moment of separation could come sooner.”
If that does happen, the pound could decline in the ensuing political uncertainty.
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