Despite the strong anticipation of a rate hike in the UK (as reported in my blog yesterday), the pound has more or less limped to a halt on the back of Chancellor George Osborne’s announcement of his increased tax on banks – imposing the full 0.05% straight away, as opposed to the starter 0.075% levy that was originally planned.
The pound pretty much fell across the board, falling a half cent against the USD and almost a cent against the euro (after 5 consecutive days on the up).
The extra levy will hope to raise £800m as Britain’s government aims to plug its record budget deficit, however the announcement will have come as a shock to banking leaders who are in the middle of negotiations with ministers about project Merlin – a deal looking to make available £190bn of credit for businesses and showing restraint in bonus payments.
George Osborne’s decision to act now, and impose the full levy straight away has been vindicated, he believes, by the increasing financial health that the banks are finding themselves in; the fact that it’s been imposed just before bankers’ bonuses are due will no doubt be seen as a decision based on political pressure.
Public pressure sways politics, and there is nothing more popular than banker bashing! But is this really necessary considering the amount the financial sector adds to the British economy? Banking leaders will meet this afternoon to discuss whether it remains sensible to sign up to Project Merlin – a decision that won’t be taken lightly if the government doesn’t resist the temptation to bash them when the political heat is on.
This sell-off of the pound is likely to be a knee-jerk reaction to the news, in an otherwise quiet day, a blip on the radar in an important week of decisions, but it will be interesting to see how the Chancellor balances the need to keep Britain as the top dog in global financial services against the understandably angry public going forward.
Edward Knox
Analyst - Caxton FX
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
For the latest forex news and views, follow us on twitter @caxtonfx and sign up to our daily report.
