British Pound Continues to Weaken Despite Guarantee of Deposits

Northern Rock’s financial troubles continue to plague the British pound. Despite the UK Chancellor’s announcement that the government will guarantee all deposits of Northern Rock account holders, the British pound has fallen for the fourth consecutive trading day to break below 2.0.

The risk of troubles at other UK banks is keeping buyers away and the UK government’s pledge will do little keep depositors from withdrawing money first and ask questions later. At this point, the Bank of England has no choice but to lean towards easier monetary policy. Up until now, they have been criticized for not taking any major steps to calm the financial markets. With Northern Rock, they have finally been forced to make the biggest UK bank bailout in 30 years. Going forward, the market will expect the Bank of England to leave interest rates unchanged for the remainder of the year with the risk of easier monetary policy if there are further problems in the UK banking sector. Tomorrow, we have UK consumer prices due for release. After dropping 0.6 percent on a monthly basis in July, the rise in oil and drop in the sterling is expected to drive consumer prices higher.

Written by Kathy Lien, Chief Currency Strategist of