Pound strengthens against the US dollar

In a quiet day’s trading, the pound strengthened against the dollar yesterday as some investors bought sterling to take advantage of Wednesday’s fall. However, these gains were capped as investors continued to digest Chancellor Alistair Darling’s gloomy budget. He revealed that the UK will run a budget deficit of 12.4% of GDP and have to issue a record £220 billion of gilts for the 2009/10 fiscal year. Following his speech, the pound fell to a three-week low against the dollar, although it recovered to some extent yesterday as investors’ risk aversion calmed.

The pound’s recovery was aided by some positive news from Bank of England policymaker David Blanchflower, who said he could see some tentative signs of recovery in the UK economy. There were also some strong results released by Debenhams who reported half-year profits of £104.2million, causing a surge in retail shares. In addition, Barclays Chief Executive John Varley confirmed that the bank had made a positive start to the year, adding it would lend an extra £11 billion to British households and businesses this year. Finally, a slow in the decline of British factory orders in April from the previous month also improved investor sentiment, although they remained wary of the state of the British economy following revelations that there is a £90 billion black hole at the heart of Alistair Darling’s budget which may require £45 billion of tax hikes and spending cuts over the coming years. The City also reacted negatively to the news that a new 50% tax rate for those earning £150,000 or more is set to be introduced, prompting fears that the UK may no longer be an attractive place to do business in the future.

In America, a report by the National Association of Realtors showing a fall of 3% in the pace of existing home sales to a much lower-than-expected annual rate of 4.57 million units shook investor confidence, as did uncertainty before US regulators reveal their stress test methodology against American banks later today.

In early trading today, the pound has weakened against the dollar ahead some important data released on both sides of the Atlantic. In the UK, Year-on-Year and Quarter-on-Quarter GDP figures are released at 9.30 BST and are expected to show that UK growth has contracted by 1.5% in the first quarter. Important UK Retail Sales data is also due for release at the same time. In America, New Home Sales and Durable Goods Orders data is out 13.30 BST and 15.00 BST respectively, with both expected to affect the dollar’s performance today.