Market News Detail

How long will sterling remain weak in currency exchange markets?

Sterling Overview

If we are to believe recent business surveys then the recession in the UK appears to be coming to an end, and most economists are predicting modest growth in Q3. As you will be aware the Bank of England (BoE) has pumped billions into the economy to provide fiscal stimulus and some could argue this is having (or has had) a positive effect, although any recovery will more than likely be slow.  

Recent housing data from the major building societies suggest house prices have bottomed-out with some areas showing signs of price increases. Also, initial Q2 GDP data indicated the economy contracted less than expected, which provided sterling a welcome boost albeit a little short-lived. 

We have had a view for a while that the BoE does not want a strong pound and in fact sterling has lost significant ground against many currencies throughout September. Interestingly Mervyn King (BoE Governor) is now on record as saying keeping sterling low is essential if the UK is to rebalance away from domestic demand to being competitive internationally.

With outlook for the UK resting heavily on increasing net exports it is important sterling remains under control. In the medium term a robust export market will be instrumental in reducing the UK current account deficit, with the possibility of having a surplus by 2013 (the first time since 1983). 

Ultimately this will be good news for the UK economy and sterling. However with exchange rate volatility expected to remain in the short term it is certainly worthwhile speaking to one of our Currency Dealers in more detail. 

GBPEUR

Much like the rest of G20 economies the eurozone has low interest rates, although unlike UK and USA the currency value has increased. Clearly there are many reasons, although recent gains can be put down to unexpected growth in France and Germany, along with an increase in manufacturing and services PMI. 

GBPUSD (Cable)

Increasing confidence in the global economy has seen the demand for safe haven US dollar assets fade, hence why we have seen the dollar fall in value recently (although not against sterling). This trend could persist for a while as markets digest economic activity. 

GBPCAD (Loonie)

According to the Bank of Canada the economy is growing faster than expected with factory sales rising at their fastest pace since 1998, boosted in part because of gains in automotive sector after launching a car scrappage scheme similar to the UK. With this in mind it is likely the loonie will remain strong against sterling for the short-term. 

GBPZAR

As many of you know the South African rand is particularly influenced by commodity prices, and with gold and platinum increasing in value recently the rand has made significant gains against sterling. However, there is a potential risk here of overvaluation, in particular if concerns about a global recovery reappear. 

GBPAUD

Sterling has been one of the main casualties against Aussie dollar recently falling to 13 year lows. However some are questioning the sustainability of such an increase, particularly after recent inflation data was the fifth consecutive result below the central banks target. 

GBPNZD (New Zealand dollar)

The New Zealand dollar, much like the Australian dollar has risen to 13 year highs against sterling after the National Bank of New Zealand business outlook survey for September showed rising confidence, fuelling speculation of an early increase in interest rates.   

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.