Sterling Rollercoaster

October 28, 2009 - Posted By (Admin) in (Finance)

Sterling started last week under the headlines “the pound gets pounded”; It was looking very difficult to put a forward a case for buying Sterling when so much negativity continues to undermine it. One thing that was strikingly apparent is only the UK and US have expanded their money supply by over 100% in the past 18 months and both have interest rates at near zero. It is no surprise then that both currencies are being used to fund positions in high yielding currencies and came under heavy pressure in the markets.

However as the week unfolded things started to improve for the beleaguered pound. UK unemployment data was better than expected with a low claimant count reported and the inflation data although weak, was not as weak as some predicted. As we moved into this week sterling continued to gain; a speech by Mervyn King did not highlight the need for further Quantitative Easing and the minutes from the last Bank of England meeting were more positive than anticipated with again no mention or reflection on expanding QE in the last meeting. This facet of QE is very important for the direction of the pound in the short to medium term- a further expansion of the programme from the current £175 billion would place the pound under further pressure as other major economies look towards exit strategies for stimulus measures. The pound rallied against the euro on the lack of QE chatter and pushed up to 1.11- not bad considering it was trading at 1.06 on a few days earlier and talk of parity was in the air.

It was not all plain sailing for Thursday and the tide started to turn on Thursday as retail sales data came in weaker than expected- this negative feedback from the consumer sector spoilt the mood and the pound dipped on the news. Later in the trading day it recovered its composure and remained steady above 1.10 against the euro as the market awaited the UK GDP data and the chance for the UK economy to show that it had finally exited the recession. When the data came in much weaker than expected at -0.4% month on month you could sense the disappointment in the market and sterling was once again beaten back down.

Looking forward the pound will now in the short term come under renewed pressure and the "parity" headlines will undoubtedly arise once again; however the euro still appears grossly overvalued especially against the USD and if retracement occurs this will naturally allow sterling to push higher against the euro. The early November UK inflation report and the ensuing Monetary Policy meeting will be crucial for the pounds direction- with no further QE we could be seeing the lows now.

Kind Regards,

Keith Spitalnick

Business Development Manager

Currencies Direct Limited

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