In the pre-budget report on Wednesday the government announced very little in the way of action to curb the budget deficit. There will be increased fears that the proposed action will not be aggressive enough with a further deterioration in credibility and confidence surrounding the debt situation. There will also be wider fears over international credit ratings, especially after the Spain rating warning. Sterling has already weakened significantly which may limit the scope for further selling but there is still the potential for losses to the 1.6060 region against the dollar over the next 48 hours as underlying sentiment will remain weak. Longer-term 1.50 looks to be realistic by early 2010 as debt fears escalate.
Debt fears remained prominent on Wednesday with Sterling weakening to below the 1.6200 level against the US dollar before a corrective recovery. The trade data was weak with a GBP7.1bn deficit for October.
In the pre-budget report, the government announced a slightly higher budget deficit forecast for the current fiscal year of GBP178bn with very little change for next year with a deficit of GBP176bn.
There was a proposed tax on banking-sector bonuses, but little in the way of fresh measures to curb borrowing levels, although labour-market taxes were raised slightly. There will be increased fears that no significant action will be taken before the general election which must be held by June 2010.
In this environment, there is a high risk that market confidence in the debt situation will deteriorate further and there is certainly a small risk that there will be a very serious loss of confidence which could propel Sterling to lows near 1.50 against the dollar within the next few weeks.