Sterling starting to gain ground

08/04/2009

Sterling has had decidedly mixed fortunes over the last month or so. The pound fell sharply against the euro from February highs of 1.1575 to 1.0550 in the middle of last month and has thus far only managed to recover around 50% of these losses. In contrast, the fall against the dollar from 1.4975 in February to 1.3660 last month has now been all but fully retraced.

Over this period, the Bank of England has cut interest rates by a further 50bp to yet another historic low of 0.5% and along with the FOMC in the States, has undertaken much publicised quantitative easing in an attempt to fend off deflation. Even the more cautious ECB, who have cut rates a further 75bp since the last newsletter, only last week indicated a willingness to follow this route although their preference is to wait another month before making a final decision on ‘unconventional measures’.

All this adds up to a continuation of fickle markets and as such, high volatility in sterling looks set to feature. However, we believe the majority of the bad news for the UK is priced into the market. Therefore, short of a surge in investor risk aversion, the outlook for the pound looks healthier. Against the dollar, we can see 1.50 to 1.55 over the next few weeks while against the euro, a break back above 1.10/1.11 would bode well for a return towards the 1.1575 year highs.

Index
bp = base point
ECB = European Central Bank
MPC = Monetary Policy Committee
Fed = Federal Reserve
q/q = quarter on quarter
FOMC = Federal Open Market Committee

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