Sterling reverses gains as the RICS balance disappoints

Sterling reversed its gains as the RICS survey showed that house prices declined at the fastest pace for two years in September. The price balance dropped sharply from -3.3 to -14.2% in September, its lowest level since September 2005. The sales to stock ratio increased slightly, but the RICS noted that enquiries from potential buyers fell for the 10th consecutive month and at the fastest rate since March 2003. Surveyors’ sentiment about the sales outlook was also the lowest since then.

Equity markets also flashed warning signals showing mortgage banks (expect Northern Rock) were also coming under pressure as funding concerns have been raised. Last but not least, the UK seems to be facing a little political earthquake after the government reversing a 10pt poll lead into a 5pts gap.

The first budget presented by the new Treasurer Alistair Darling is viewed as business and consumer unfriendly, according to BNP Paribas analysis. The Telegraph reported that average UK families will end up with a GBP2600 higher tax bill once the measures of Darling’s mini budget are implemented. While the higher tax bill is likely to hit confidence, changes to the capital gains tax (discrediting long term investors) could result in last minute asset sales ahead of April when the new tax laws become effective. The introduced tax measures do not bode well for FDI investments. Bear in mind that the UK’s portfolio flows are in deep deficit and the only reason why the country had been able to fund its 4% of GDP current account deficit under conditions of a strong sterling has been money market and FDI inflows. With FDI investment likely to shy away from the UK, sterling fortunes will be driven by short-term money market investors. BNPP anlaysts expect the MPC to cut rates early next year suggesting sterling losing its interest rate support. But while GBP/USD has come under downside pressure in the overnight, we expect losses to be limited given the weak USD. Until Bank of England signals that the Bank has to cut rates, the divergence in policy between the BoE and Fed will keep

GBP/USD broadly supported above the 2 handle.

If early support at $2.0336 is seen and holds, our charts show a rebound potential to minimum 2.0382, and following a break above 2.0438, head to the triple top formation of 2.0495.