Shares took a tumble again yesterday as The Treasury gave a warning over the UK’s financial situation.
The FTSE 100 slipped below the 5,000 mark and the pound fell one per cent against the dollar following a warning from Fitch, the ratings agency, that the UK needed to do more to tackle the deficit.
Fitch warned that Britain faced a ‘formidable challenge’ and said more action would be necessary in the coalition's Emergency Budget on 22 June to reduce public spending and cut the deficit.
Following the publication of their report sterling fell and the FTSE 100 sunk below 5,000 before recovering slightly to 5,020 at the end of the day.
The markets have faced uncertainty this week after the Government announced the details of their proposed spending cuts on Monday.
Benefits, tax credits and public sector pensions are some of the areas facing review this autumn in order to save money and around £60 billion in total is expected to be cut from public expenditure.
But Caxton FX has warned that the cuts could slow down recovery and have a distinct effect on sterling if investors become cautious.
Duncan Higgins, senior analyst at Caxton FX said: "The pound's rally against the euro could come to an abrupt halt should the spending cuts prove to be too much too soon. The government needs to find a fine balance: one that sufficiently appeases the market's desire to see the deficit cut, but falls short of strangling the fledgling recovery.
"Through the summer, we expect to see sterling's rally against the euro continue, albeit at a more gradual pace than we have seen recently. Fears about the eurozone banking crisis are failing to subside and investors will be inclined to continue selling the currency.”
He also warned that sterling could suffer further because The Bank of England will be less inclined to raise interest rates in order to shield the economy against the cuts.
Full details of the cuts will be announced in the Emergency Budget on June 22.
© Fair Investment Company Ltd