Pound survives 100 days of coalition - but will it last?

Sterling performed well during the first 100 days of coalition government. John Freeme from foreign currency exchange specialists HiFX considers whether this strength will continue.

With the exception of the very first day, when it became clear that no single party had a working majority, the pound performed fairly well during these first 100 days.

Getting the economy back on track

There were several things the coalition government needed to do and no time to waste if they were to get things back on track.

Almost certainly, the most pressing and challenging task was to convert the negative sentiment surrounding the UK economy and sterling in general. The market lacked confidence in the leadership of the country and thus, traders lacked conviction in buying the Pound.

A professor of political science was quoted when US president Obama was first elected, saying ‘Getting the public on board with his initiatives will be one of Obama's chief tasks.’ This was to be no different for David Cameron.

Fortunate timing

Many will argue about how much of the recovery was down to the coalition government and how much was down to pure luck that something bigger and uglier came along to steal the limelight at the right time – the Greek debt crisis.

In the immediate weeks following the election of the new UK government, it became apparent that a number of the peripheral eurozone members were on the verge of bankruptcy.  This resulted in a swift sell off in the euro, with investors instead buying into currencies considered a safer bet.

Overnight, the focus shifted from the issues in the UK to those in Europe. For the confident and well spoken new prime minister, it was an opportunity certainly not to be missed as the situation in Europe provided the perfect justification for immediate action towards Britain’s deficit. He laid out policies to cut Government spending and reduce the enormous sovereign debt, which he repeatedly blamed on the previous government and vowed a “new era of thrift.”

Sterling has rallied significantly

So regardless of the reasons, 99 days later sterling had risen 7% against the euro to 1.22 and rebounded 8% against the US dollar to 1.5630 since the election of David Cameron. The question is can he now replicate the first 100 days in the next 100 days with such grand promises of thrift?

Tough times ahead

So far, Cameron’s fiscal plans have been very well received. Market players have a far more positive outlook for sterling right now, especially after the strongest quarter of growth in the UK for 9 years. Even the world’s biggest bond investor, Pimco, which is followed by large segments of the financial world because of its size, has reversed its position on investing in the UK, as it is more optimistic about investing in Britain following the drastic budget cuts announced by the government.

However, going forward it looks things may well get worse before they get significantly better. In general, belts will need to be tightened across all industries and locations. Government spending is set to be slashed by 25%, leaving the average family £400 worse off than before and the VAT rate will be increased from 17.5% to 20% in January 2011.