The pound fell heavily yesterday, losing 1 per cent against the Euro as well as dropping to a low of $1.5373 against the dollar.
The fall came in response to fears that the UK economy will continue to trail that of the US in terms of recovery. The UK budget deficit figures prompted the fall in the pound’s foreign exchange rates. Government spending exceeded revenue by £4.3 billion in January. The dollar was also strengthened by the surprise announcement by the Federal Reserve to lift its discount rate by 0.25 per cent to 0.75 per cent.
The UK figures were particularly alarming to analysts as January is traditionally the largest tax collection month of the year and the government still failed to generate a surplus.
ING Financial Markets analyst James Knightly explained, "this is potentially very worrying. Given concerns about public deficits around Europe at the moment, this could put the UK back in the spotlight."
Standard & Poor’s negative outlook on Britain’s AAA rating remained unchanged after the news was announced.
Rabobank International currency strategist Jeremy Stretch added that more quantitative easing is by no means out of the question. He said, “the market doesn't need much reminding of the weak fiscal situation in the UK. The risk of more quantitative easing should weigh on sterling."
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