The UK currency tested support below the 1.49 level against the dollar on Monday while it also weakened to beyond 0.85 against the Euro. In the pre-budget report, the government confirmed that the VAT sales tax rate would be cut by 2.5% to 15.0% until the end of 2009 while there was a total tax cut package of GBP20bn. There were further measures to underpin companies while there were plans to raise taxes in the medium term.
The budget deficit estimates were revised up sharply with the fiscal 2009/10 deficit forecast at a record GBP118bn which would be at least 8% of GDP. The package may underpin sentiment to some extent on hopes for a boost to spending, but fears over the underlying fundamentals will certainly continue and are liable to increase given the severe budget pressures.
A sharp rally in the UK stock market index pushed the UK currency to highs above 1.5150 against the dollar and was consolidating close to 1.51 on Tuesday.
The latest mortgage-lending data continued to indicate a weak market while Bank of England Governor King was generally downbeat over the economy and stated that the bank would take all action necessary to meet the inflation target
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