Pound Erases Gains As Increase In Government Borrowing Raised Fears Of Future Taxatio

DailyFx · August 20, 2009, 6:10am

The pound started to erased earlier gains following a report that showed the U.K. government increased its debt level by £8 billion which has raise fears that future taxation will limit growth. It was the worst reading on record for the month which is a time when the government receives tax revenues from companies.

[B]Talking Points
• Japanese Yen: Consolidating Losses Form Yesterday
• Pound: Weighed by Increase in Government Debt
• Euro: Range Bound With Lack Of Catalysts
• US Dollar: Initial Jobless Claims, Philly Fed on Tap
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Pound Erases Gains As Increase In Government Borrowing Raised Fears Of Future Taxation[/B][/U]

The pound started to erased earlier gains following a report that showed the U.K. government increased its debt level by £8 billion which has raise fears that future taxation will limit growth. It was the worst reading on record for the month which is a time when the government receives tax revenues from companies. The GBPUSD had reached a weekly high of 1.6007 after an initial spike following a 0.4% gain in July retail sales. Sales of household goods rose 4.5% led by furniture purchases adding to the signs of growth for the economy. Sterling was finding support on continued risk appetite prior to the releases and the rise in consumer consumption was looking to add to its appreciation before the government borrowing report derailed bullish sentiment.

Yesterday’s BoE minutes sunk the sterling as several members called for further quantitative easing measures beyond the £50 billion that was announced. However, rising demand for equities and confirmation that the central bank didn’t have knowledge of the most recent inflation report when they made their decision helped reverse losses. The unexpected flat reading in July consumer prices could have made a significant difference in the voting. Nevertheless, the central bank is still choosing to error on the side of caution which may not reflect the true prospects for the economy. The pound has unexpectedly held its ground the past few days and may continue to do so today on the back of higher equity markets. Yet, the GBP/USD continues to find resistance at the 20-Day SMA at 1.6589, which may leave the past of least resistance to the downside.

The Euro has remained in a tight range overnight between 1.4210and 1.4250 as it continues to consolidate it gains from yesterday. An empty economic calendar didn’t provide any fundamental catalyst for price action and we may see the EUR/USD driven by dollar event risk today. However, we did see tow significant Swiss releases which proceed signs that the region’s economy is stabilizing as it is the country’s main trading partner. Swiss exports rose for the first time in three months by 4.1% which is a sign that European demand is rising. Additionally, the Swiss Zew investor sentiment survey jumped to 18.6 from 0 which was the highest since July, 2006. A level to watch today is 1.4047-50.0% Fibo of 1.4448-1.4047 which has provided resistance the past two days and failure to break above could increase downside risks.

The dollar has started to consolidate its losses form yesterday but remains subdued as risk appetite remains firm. Equities continue to trade higher, defying concerns over a limited recovery. Indeed, yesterday’s surprising 8.4 million bbl drop in crude inventories helped erase concerns over weak consumer consumption. Todays expected improvement in initial jobless claims could add to the increasing optimism for domestic demand and further weigh on the greenback. However, if we see labor conditions deteriorate it will reinforce existing fears that unemployment will reach above 10.0% leading consumers to remain retrenched. Meanwhile, the Philadelphia Fed reading is forecasted to rise to -2 from -7.5 continuing the trend of increasing activity. A positive reading would continue the trend of strong manufacturing performances across the country which has been an area that equity bulls point toward in their argument for a stronger recovery. A positive reading from the leading indicators for a fourth straight month will also add to the improving outlook.

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