Sterling Falls as UK Consumer Confidence Weakens

The British pound fell against the major currencies today following an update indicating that consumer confidence is on the decline in the UK. For August, the consumer sentiment index administered by the Nationwide Building Society lost 2 points, falling to a reading of 49 for the month. This matches the lowest result since April. The forward looking index suggests the index could fall another 3 points in the next few months.

The news put a halt to recent gains for the pound. Against the euro, sterling dropped to a two-week low of 0.8690, while against the dollar, sterling declined 0.6 percent to $1.6280 in late-day trading in London.

Consumers continued to suffer through higher prices in July with the Consumer Price Index climbing an annualized 4.4 percent after jumping 4.2 percent in June. A steep increase in energy costs along with an increase in the Value-Added Tax (VAT) from 17.5 percent to 20 percent contributed to the hike in prices.

Despite the increase in CPI, the recovery appears to have stalled. Unemployment remains elevated with 2.5 million people currently out of work. Youth unemployment is particularly troubling with more than 20 percent of workers under the age of 25 looking for placements. A recent survey of businesses suggests that the employment outlook will continue to deteriorate for the remainder of the year with the unemployment rate projected to reach 9 percent by the time 2011 draws to a close.

The weaker consumer sentiment and worsening employment picture may provide the Bank of England with sufficient reasons to hold off on an interest rate hike. Governor Mervyn King has argued for several months now that even though the Consumer Price Index is well above the 2 percent target rate for growth, raising interest rates is not in the best interests of the country. According to King, the anemic pace of growth could very well turn negative should borrowing costs rise providing further inducement for consumers to hold off on the purchase of big ticket items.

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