Market News Detail

Has sterling been oversold?

We trust you had a Merry Christmas and hope you have a prosperous 2009.  I am pleased to provide you with our latest market commentary, which offers a useful insight into the main foreign exchange headlines over the last few weeks.

Sterling Overview

Sterling suffered some big losses following the cut recording new lows against both euro and US dollar and with the expectation of lower interest rates to come in 2009 it seems the pound will remain under pressure in the short-term. Sterling has fallen sharply in the past year against the dollar and euro with depreciation of 28%, and 17% respectively. This is having a big impact for importers, however the export market is showing robust growth. With this in mind we expect 2009 to be a bumper year for inward investment and tourism as foreigners take advantage of the cheep pound. This is similar to what happened in the early nineties and helped the UK to accelerate out of recession.

Retail sales evidence suggested that spending may have been firm over Christmas, but overall sentiment remained extremely weak due to a lack of confidence with expectations of further economic weakness to come. 

In our view the pound is likely to remain weak in the short-term, although we have been saying for a while that sterling is undervalued and it is only a matter of time before a correction takes place.

GBPEUR

Like the BoE the European Central Bank (ECB) slashed interest rates by 0.75% at December’s meeting reducing the base rate to 2.5% in the eurozone.  The ECB maybe reluctant to push interest rates much lower however further cuts are likely to be necessary as the economic slowdown intensifies.  Despite the dismal outlook for the eurozone, an extremely weak pound has meant the euro has made substantial gains against the pound with the possibility of parity now seeming ever more likely.

GBPUSD (Cable)

Interest rates in the US are now at 0% following a 1% cut in December leaving few monetary policy options available for the Fed.  The UK currency dipped to a fresh low of just below 1.44 against the dollar, the lowest reading since 2002.  Further falls could also be likely as we expect the dollar to remain strong against most of its main trading counterparts including the pound.

GBPCAD (Loonie)

The Canadian dollar strengthened significantly against the pound last month.  Although the Canadian economy is not boasting good economic figures, it is widely viewed to be in a much better position to cope with the global economic crisis.

GBPZAR (South African rand)

Unlike November we saw some big movements with the rand last month as the unwinding of carry trades took affect on the South African currency.  Interest rates remain at 12% and we expect volatility to remain high although it appears to now be trading at a more natural level.

GBPAUD (Australian dollar)

The Reserve Bank of Australia cut interest rates again in December, this time by 1% reducing the base rate to 4.25%.  Following depreciation of the Aussie dollar against the pound on previous rate cuts the dollar made gains against the pound on this occasion following the gloomy outlook for the UK economy.

GBPNZD (New Zealand dollar)

Like most other Central banks, New Zealand cut interest rates in December.  The Kiwi base rate now sits at 5% following a 1.5% reduction last month and despite this made gains against the pound due to the lack of support for sterling.