Sterling fell sharply against the euro and dollar yesterday following the Chancellor of the Exchequer Alistair Darling’s pre budget speech where he told parliament the UK would have to borrow more money and he also cut the 2009 forecast for the economy. The pound was down against 12 of the 16 most traded currencies as a result of comments made by Darling which included the government borrowing deficit will need to be increased by £5bn within the next four years.

The UK economy will shrink by 4.75% this year which is more then the government estimated back in March where they then believed it would have been between 3.75-3.25%, however they still feel it will return to growth in the fourth quarter.

According to the Organisation for Economic Cooperation and Development, UK public debt will climb to 89.3% of the economy in 2010, from 75.3% this year.  Darling’s forecasted the UK economy will grow between 1-1.5% next year and by 3.5% in 2011-12, with inflation set to rise from 1.5% to around 3% early next year before finally falling back.

Based on Darling’s comments, sterling fell to session lows of €1.0997 falling over a cent from the days high of €1.1104 and $1.6170 down 2 cents from the peak of $1.6374 its lowest level since Oct 15th this shows the pound is still vulnerable.

Below are the key points of the budget.

Taxes

·          All national insurance rates to rise by a further 0.5% from April 2011, raising £3bn a year

·          VAT to return to 17.5% from 15% from 1 January 2010. No other changes to VAT

·          One-off 50% tax on bank bonuses of more than £25,000

Borrowing

·          2009 forecast raised by £3bn to £178bn

·          Estimated borrowing of £176bn in 2010 and £140bn in 2011, falling to £96bn in 2013

·          Budget deficit to be halved by 2013

·          Estimated public loss from bank bailouts reduced from £50bn to £10bn

On a positive note the UK consumer confidence in November stayed close to its highest level in 1 ½ years, the index of consumer sentiment was at 73, the same as October and one point lower then Septembers highest reading.

Data released today includes the BoE interest rate decision which many feel will stay at an all time low. In the US there is the release of jobless claims and Oct trade balance.

At 9.15am the pound was at $1.6275, €1.1058, 12.27 ZAR, 143.648 JPY, 11.55 SEK and AU$ 1.7774. The euro remained 3 cents of the 2009 high against the US dollar at $1.4710

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