Ralph Shell @ 1:55 PM, Tuesday June 22 2010
This morning the pound was checking out the support in the 1.47 area when the new 39 year old Chancellor of the Exchequer George Osborne announced plans to reduce the budget deficit. Spending cuts, a two year public sector pay freeze, and higher taxes are all planned. Capital gains taxes will be immediately raised to 28% from 18%, the vat tax will go from 17.5% to 20%, plus a special tax on banks. Currency traders applauded the plan and the pound rallied back up to 1.4850.
There is a debate by the economic planners. If an austerity program begins during a time of weak economic activity, will this severely diminish the rate of growth? Spending is a stimulant, the Keynesian 's claim, and removal of spending will restrict growth. British equities were lower, but gilts appreciated smartly as the U.K. Debt Management Office reduced financing needs by £20.4B next year.
The debate over fiscal policy in the US is raging. On one side is Alan Greenspan, championing reduced spending and reducing the budgetary deficits, while Paul Krugman favors the administration's big spending ways. The current US Congress, by choice, is failing to propose any budget this year, and today the director of the Office of Management and Budget, Peter Orszag today resigned. Obviously the big spenders remain in charge in Washington, confident they will be able to spend their way to prosperity.
The ability of the US to keep spending, depends on the continued ability of the Government to borrow. With US Treasury debt soaring, and Britain, Europe and Japan, all paying lip service to fiscal responsibility, is it possible the forthcoming G-20 meetings will produce a schism between the US and it's creditors? Generally these meetings are all for show. Everything is usually discussed and resolved prior to the meeting, even including the menu and seating arrangements.
The pound has long been a most favored place for the big spec shorts, who have been so positioned prior to the election. The advance from the 1.4230 low has been orderly, but the market looks to us like there may be more in the bounce. Try to get long on a retrace to the 1.4780 level for a potential rally above 1.50. We doubt the G-20 meeting will have much baring on this pair, but it might have further merit on it's own.
Author: Ralph Shell - ForexRazor Analyst - Graduated from a small Ohio liberal arts college. Graduate studies in economics and history at Duke University. Ten years experience trading cash commodities in domestic and export markets. Former commodity analyst with Merrill Lynch in Chicago. Member of and floor trader at the Chicago Board of Trade for 18 years.