The British pound remained under considerable pressure against the US dollar and euro at the start of the week, continuing last week’s trend. UK data was actually surprisingly strong, as the Rightmove House Price report showed that home prices rose 0.6 percent in September, which pushed the annual rate up to a 15-month high of -1.5 percent from -3.1 percent. The data is in line with other UK housing indicators that have shown increasing prices in recent months, suggesting that demand may finally be starting to pick up.
Nevertheless, the overriding concern for the British pound is the UK’s deteriorating fiscal health. Last week, data showed that public sector net borrowing in the UK jumped a whopping 16.1 billion pounds during August as income tax receipts fell 13 percent from a year ago. Even worse, the deficit reached 127 billion pounds in August from a year ago, and the steady rise suggests that the shortfall may breach Chancellor of the Exchequer Alistair Darling’s full-year forecasts for a deficit of 175 billion pounds. Standard & Poor’s already downgraded the UK’s credit outlook to “negative” from “stable” in May because of their budget woes, and while they’ve also said that they would reserve any judgment on potential downgrades until the next general election, mounting deficits don’t bode well for the nation’s golden AAA credit rating. Ultimately, this leaves a long period of time open for speculation on the prospects for the UK’s credit rating to reign supreme, which may make the already-volatile British pound even choppier.