Sterling falls on political uncertainty

WITH all the uncertainty going on in Downing Street, economists and currency experts have been trying to predict what it all means for the value of sterling over the next few months.<br /><br />&ldquo;The situation means that the investors are a bit more worried and so they&rsquo;re less likely to buy British assets, which will have a negative effect on sterling, and may put a bit of upward pressure on yields,&rdquo; said George Buckley, UK economist at Deutsche Bank.<br /><br />The uncertainty encouraged traders on Friday to sell the pound against the dollar, but otherwise the markets have remained relatively unruffled by the chaos in the British cabinet.<br /><br />With the growing possibility of an election sooner rather than later, the more salient question for economic analysts was how a new government &ndash; probably Conservative&ndash; would act to tighten policy in light of the ballooning fiscal deficit and the recent Standard &amp; Poors outlook downgrade for UK debt.<br /><br />Citigroup&rsquo;s Michael Saunders says that if the Conservatives were to win the next election by enough to indicate the chance of at least two terms in government, then the new government could probably implement sufficient fiscal restraint over several years to put the fiscal position back on a sustainable path and maintain the UK&rsquo;s top-notch credit rating.<br /><br />To implement this fiscal restraint, Jamie Dannhauser at Lombard Street Research says that the Tories have a choice between cutting spending costs and raising taxes. &ldquo;You would assume the Tories to be more fiscally conservative but they haven&rsquo;t really outlined their fiscal plans in detail.&rdquo; <br /><br />A new government with a large majority would clearly have a strong mandate, probably face a divided opposition and could blame their predecessors for the fiscal problems, according to Citigroup&rsquo;s Saunders.