Pound tumbled from the start of the European open today losing more than a cent as it traded nearly 200 points lower than the highs set yesterday, after an article in the UK Telegraph suggested that UK may face a sovereign debt crisis as the year develops.
The Telegraph quoted the large US fixed income investment house PIMCO as saying that they will not be buyers of UK gilts because of the massive issuance coming out in 2010. Paul McCulley, a managing director at Pimco, said: "We are currently cutting back in the US and UK because... supply and demand dynamics are likely to be negatively affected as borrowing rises and central bank buying declines."
Cable was also kneecapped by yet another rejection by Cadbury of the Nestle takeover offer that weighed negatively on M and A flows. The rise of risk aversion weighed heavily on sterling which is highly sensitive to risk flows given UK economic dependence on capital markets.
The fears of a financing crisis is the one factor that could scuttle the nascent recovery in UK economy especially at a time when the BoE considers the possibility of exiting its 200 Billion pound quantitative easing program.
Over the past week cable has rallied strongly off its lows as the economic data surprised to the upside. Today’s UK PMI Construction numbers could allay some of the fear currently extant in the market if it beats expectations as well. For now however, the tug of war between the bulls betting on a stronger recovery and growth prospects and bears fearful of financing troubles ahead will likely continue, with 1.6000 once again the immediate level of interest and the recent swing low of 1.5837 the key level of support.
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