With the spotlight very much on the euro over the last few months, the pound has been under the radar for some time now. It quietly attained a fresh 16m high against the single currency overnight; it has attracted some capital inflow from the Continent into both gilts and London property from investors keen to reduce exposure to the troubled euro; and at times it has even been spoken of as a safe haven. Despite the country’s dreadful fiscal predicament, the 10yr UK gilt yield is now just above 2.0%.
Interestingly, the pound has given back some of its recent gains against the euro this morning, which is not surprising given the amount of negative news around. According to Visa, UK consumer spending fell 1.0% mom in December, and by 0.8% yoy. Deloittes report that there was an 11% increase in the number of retailers that went into administration last year, with a further spike likely in the current quarter after the very challenging trading conditions in the final months of last year. The UK consumer continues to keep their collective wallets tightly shut.
However, the most troubling development for the currency today is a report in the FT suggesting that the Prime Minister might be warming to the idea of raising the UK’s contribution to the IMF (which will ultimately be earmarked for saving Europe). According to the article, the issue of increased contributions to the IMF’s kitty is likely to arise at the G20 finance minister’s meeting next month, and if the likes of Japan/China/Brazil are in agreement, then the UK may be compelled to join them. The UK has already pleaded for more time before committing extra funds to the IMF as part of last month’s EU pledge to send EUR 150 bn over to Washington. Those eurosceptics in the Conservative party will be aghast that so much extra money is being demanded at a time when the country is desperately trying to remedy the horrendous state finances. If there is any indication that the Prime Minister is prepared to write a larger cheque for the IMF, then it will definitely hurt the currency. Very simply, the larger the cheque, the bigger the damage for the pound.