After the giddy highs reached during the Olympics and Para-Olympics, the UK economy checked back into reality with the UK public sector net borrowing reaching its highest August budget deficit since records begun.
The deficit, excluding the support by the government for the UK banks, hit £14.4 billion in August, according to the office for national statistics and piled more pressure on to the already beleaguered Chancellor of the Exchequer; George Osborne, as tax revenue in the UK fails to keep up with government spending and emphasize the damage caused by weaker than expected output in the UK for 2012. Tax revenues increased by only 1.8% from the previous year, whilst government spending increased by 2.5% from the same time last year.
The budget deficit for the first 5 months in the fiscal year beginning April expanded to £59 bn from £48.4 bn from the previous year and signs are that the UK government will not succeed in achieving its target of clearing its structural budget deficit by the year 2015. With public sector net debt now at £1.04 trillion for August, (66.1% of gross domestic product), the UK economy contracted for a 3rd straight quarter for the three months starting June, and is expected to contract for the whole of the year for the first time since 2009.
Despite the doom and gloom surrounding the UK economy, there was some consolation in the figures for the British government as the reduction in the estimate of borrowing last year showed that the government was £119 bn in the red instead of the £125 bn which had previously been reported, plus the deficit is only fractionally higher than this time last year. This may explain why the GBP/USD closed Friday up 0.08%, trading at 1.6228 and the FTSE closed down just 0.03%, valued at 5852.62.
The GBP/USD was showing little movement over this past week, until a noticeable rebound from Thursday through to Friday’s bell, closing out in the positive. This makes the weekly tally of bullish candles to total seven; the longest run since December 2004. As the markets do not like extremes – It is highly probable that a correction is very likely, but will it be a gentle consolidation or a strong retracement?
No major UK economic reports are scheduled for release next week until Thursday’s GDP announcement, so traders can expect a bit more stability with the GBP early on. Currently at 1.6228, technical support levels can be seen at the 10 DMA line at 1.6172 followed by 1.6012 at the 21 DMA lines, whilst resistance levels are seen at 1.6304, followed by 1.6455.
Long term, traders should keep an eye on just how much more debt the UK government will amass before the end of the year and whether George Osbourne abandoning or rethinking the target of structural budget deficit would spook the financial markets and cause borrowing costs to rise given the fragility of the both the UK and the global economy.