httpvh://www.youtube.com/watch?v=EHbDuD_6PJE

·         First January deficit since 1993

·         Gilt vs. Bund spreads widen to 4 year high

·         60 economists back the Government’s plans for spending cuts

·         Fed hikes discount rate, dollar powers ahead.

All this and more is available on our blog. Click here  http://www.worldfirst.com/blog

Sterling slackened yesterday as deficit figures showed exactly how dire UK public finances have become.

January is normally a good month for government coffers as those who self assess their tax liabilities have paid up; the thoughts were that we would have a surplus yesterday of around £2.8bn. How wrong we were. The surplus was instead a deficit and a whopper as well: £4.3bn. The Treasury will have had that sick feeling in their stomach we all get when we check our online banking after a particularly brutal night on the sauce. Terror. The spread of gilt yields over bund yields on a 10 yr horizon rose to a 4 year high. This is a bearish sign for the UK as it signifies that investors want a higher yield to take on the additional risk of UK debt. This also pretty much means we will NOT see an interest rate rise in the UK this year.

As a result sterling lost ground; even against the ailing euro and will probably continue to today as well if overnight developments are anything to go on.

On Monday we told you about a letter between 20 prominent economists that backed the Conservative party’s spending plans for a post-election Britain. Well in today’s FT, 60 economists come out in favour of the government’s plan for delaying until 2011. This split only forms a crevasse for sterling to slip into. To have such disagreement on probably the most important, certainly financial, election question is a real worry for the pound and will lead to further talk of a ‘hung’ parliament.

The real performer in the FX markets however this week has been the US dollar and that has continued overnight. Last night the Fed announced that it was increasing the discount rate from 0.5% to 0.75%. Now this is not a change in the Fed funds rate and is not a shift in monetary policy but markets have treated it as a precursor. The discount rate is the rate at which banks borrow from the Fed on an overnight basis. The Fed were keen to point out that the change “does not signal any change in the outlook for the economy or for monetary policy”. This is a clear signal that the Fed believes that the US economy is strong enough to stomach this increase and therefore we can expect further dollar strength.

The prospects for sterling will probably not be helped by data today. UK retail sales (09.30) are probably going to be pretty rubbish given the poor BRC figures we saw last week alongside the fall in consumer confidence. We also have US CPI at 13.30.

Have a great weekend.