PureFX

Sterling Overview

Despite an upward revision of Q4 GDP sterling has lost considerable value against most currencies.  The UK economy is estimated to have grown by 0.3% for the 4th quarter compared with an earlier estimate of 0.1%.  Market consensus had been for a 0.2% revision so you would have expected sterling to strengthen but political uncertainty weakened confidence in the economy and the country’s ability to manage the mounting budget deficit.

Recent opinion polls have shown a narrowing in votes between the two leading parties with neither the Conservative nor Labour party showing a clear lead.  A hung-parliament could be a realistic possibility and given the opposing views this could be disastrous, largely as it would be difficult to push through vital legislation to attack the UK’s enormous budget deficit.  This narrowing of the polls triggered a huge sell-off in sterling which, unfortunately coincided with the sale of billions of pounds into US dollars following the announcement that Prudential hoped to acquire AIG’s Asian business, weakening the pound further.

February was not all doom and gloom, and I am keen to mention sterling enjoyed its strongest position against the euro for 8 months reaching more than 1.16.  Also, PMI data bounced back this morning with a reading of 58.4, up from 54.5 in January and the highest level since January 2007.

Going forward we anticipate sterling will remain weak given current political status, and the possibility of further QE (Quantitative Easing) following comments from Bank of England Governor Mervyn King last week.

GBPEUR

Sterling hit an 8 month high against the euro although was unable to sustain gains and has since depreciated notably.  Rumours of a possible deal for Greece boosted the euro and more recently details of an austerity package totalling €4.8 billon have been leaked although there is uncertainty on the level of support that Greece will receive from the EU.

GBPUSD (Cable)

The US dollar is without doubt the strongest major currency at the moment having made large gains against both the euro and pound.  To put this into context, in our last report we mentioned a break of 1.60, this month the market has broken 1.50.  Economic data releases from the US suggest the economy is recovering and talk of a rise in interest rates fails to go away despite reiteration from the Fed that they intend to keep interest rates low for the foreseeable future.

GBPCAD (Loonie)

The RBC (Reserve Bank of Canada) maintained interest rates at 0.25% and its meeting yesterday although expectation of an interest rate rise this summer increased following a report from Statistics Canada that the Canadian economy grew by 5% during the final quarter of 2009, which was 1% higher than analysts forecasts.  This has only added support for the Canadian dollar against an already vulnerable pound.

GBPAUD

The RBA (Reserve Bank of Australia) raised interest rates by 0.25% to 4% at its meeting earlier this week strengthening the Aussie dollar further and showing few signs of easing, especially against sterling which is particularly weak at present.

GBPZAR

Consumer price index unexpectedly fell in January.  Analysts had been expecting higher number and now feel inflation will keep below its target for the first 6 months of 2010.  Although inflation will probably still be too high for the Reserve Bank to lower its interest rates when they meet later this month and could even remain on hold throughout 2010.

GBPNZD (New Zealand dollar)

Interest rates remain on hold in New Zealand although recent economic data confirming a sharp jump in consumer confidence, a stronger than expected trade surplus of $269 million along with rising inflation will place pressure on the RBNZ (Reserve Bank of New Zealand) monetary policy.

We hope this newsletter has been useful and for further information please contact your Pure FX Currency Dealer on +44 (0) 1494 671800. Nothing in the newsletter should be construed as advice or guidance as to when to buy or sell currency.