Although sterling has been one of the most effective rate year to date, there are still signs that he gets a push only in connection with a shift in interest rates for Britain. Most clearly noticeable in two-year spreads, which tend to historically best reflect correlated with the dynamics on the forex, and reflect a fairly dramatic change in expectations for interest rate securities. No wonder a significant expansion of spreads on two-year interest rates in Britain and the United States, as markets have become more afraid of changes in the position of the Bank of England. The spread widened to 70 points up almost 100 points last week, before returning back to 90 at present.Sterling does not seem to cope, given the relationship to an abrupt movement to a two-year spreads on the backdrop of rising British interest rates and a slight increase of U.S. rates. Another factor that must be borne in mind is that over the past few weeks, all happening in an environment of weakening the dollar. Last time I wrote about this earlier this month, I called this process "crisis of confidence in sterling, and there is every reason to think that the title is still valid.
As for fiscal and monetary policy on the fronts of power are in uncharted waters. On the fiscal side, the main impact of the approaching austerity measures, which should come into force this year and beyond, we still see a sign that the private sector is likely to face with the greatest weakness. Indeed, tomorrow's GDP figures are likely to show decline in their contribution to the construction sector, which was an increase of more than 10% over the past two quarters.
With regard to monetary policy, regardless of rate selected by the Bank, the success or failure can be discussed only in the next year or later. At the moment, rising inflation and inflation expectations remain major problems, which fights against the Bank of England, which currently means that the battle is not lost, but the victory was even farther. Crisis of confidence in sterling, it seems, will continue in the coming year.
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