Tuesday, 22 Jun 2010

GBP Saved by Britain's Austerity Budget?

With the trading day in full swing, many analysts seemed to have been forecasting a drop in the British pound just hours ago. Ahead of the British Annual Budget report there were some skeptics which were anticipating a soft jobs report and a drastic austerity budget. The budget release was indeed full of tax increases, from VAT to capital gains, as well as a muted growth forecast, which no doubt led the pre-announcement drop.

Prior to the budget announcement traders were witnessing a decline in the value of the GBP, with forecasts for a further drop perhaps being priced in. However, we've experienced a short-term bounce as the price began to absorb the news that Britain may indeed go as far as necessary to save itself from further economic woes.

Now that the value of the GBP/USD has sprung back towards 1.4781, from as low as 1.4689 this morning, one begins to wonder whether such an upward correction can sustain itself back into the previous uptrend. Given the austerity measures which will begin to come into effect over the next few months, it appears more likely that a drop should occur prior to a healthy recovery.