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UK set for Austerity Measures Announcement

Good Morning. Wednesday 20th October 2010 has long been on a pedestal for market watchers as we brace ourselves for the start of the biggest cuts in public spending that the UK has seen since World War Two.

Sterling starts the day under pressure following yesterday’s CBI data and with both the spending review and Bank of England minutes set to be announced this morning, things look bleak.

Valentin Marinov, currency strategist at Citibank said, “Investors remain cautious about the impact of spending cuts on the UK economy, and indications that the government wants to postpone some fiscal austerity measures could prompt more unease about the near-term outlook for the economy.”

The headlines across some internet sites on Monday stating ‘Welcome to the Double-dip’, indicating that the UK now faces another tough year ahead could well hold some ominous truth, rather than a tongue-in-cheek warning.

Markets have reacted already since the beginning of the week with a glut of fundamental data releases further compounding sterling’s woes. GBP-USD fell to a 3 week low despite the dollar’s apparent weakness and the pound continues to close the day lower and lower against the majors, and is currently the worst price for euro buyers since May.

We will have more on the spending review throughout the day.

For any one who’s looking for a more positive slant on the economy may want to look away now.

Mervyn King, not known as the greatest advocate of positivity towards the ailing economic picture that he and his Bank of England pals have painted has once again opened his mouth, providing writers like me many quotes to excite, inspire and motivate. Or not.

Speaking to an audience in the West Midlands last night King warned that the UK faces an “unpleasant, sober decade ahead”.

“The next decade will not be nice. History suggests that after a financial crisis the hangover lasts for a while” he added. Following a warning that there would not be a speedy recovery as the re-balancing of the economy would take some time King then went onto to say that the economy was still “barely growing at all” which lends some support to the double-dip recession now being a real threat.

The Bank of England minutes have just announced that there was a 3 way split on the vote regarding quantitative easing, with 7 voting to keep things on hold both in terms of interest rates and QE, one voting increase QE and the other voting to see a rise in interest rates. A split in voting essentially means that the policy makers are not singing off the same hymn sheet, which shows some uncertainty regarding the economic outlook amongst the people who frankly, should know.

Buyers of currency who have sterling in hand would be well placed to try and secure something on these markets soon, as the spending cuts along with the glut of negative UK data seem only likely to see sterling heading lower, towards the levels that we saw in 2008, during the decline into the last recession.