Market News Detail

Sterling ranges in Foreign Currency Exchange markets

Sterling Overview

October was a mixed bag for sterling as reports early in the month suggested a weak pound in the run-up to Christmas with the Telegraph talking about parity against the euro before the turn of 2010.  A currency expert on the BBC also complimented that view. 

The following week, sterling made substantial gains as speculation grew that the UK recession may come to an end.  This provided some much needed support for the pound although was short-lived as 3^rd quarter GDP estimates suggested the economy contracted and is in fact still in recession, a period of 6 consecutive quarters now. 

Of course, these figures may be revised up/down but nevertheless this was a surprise to most of the market and consequently resulted in losses for the pound. An article published by Goldman Sachs quoted the pound as arguably the most undervalued currency and this provided some short-term support although with the likelihood of an increase in QE (Quantitative Easing) at November’s Bank of England (BoE) meeting, the pound is likely to face further pressure.  One of the nine Monetary Policy Committee (MPC) members has already suggested that the BoE may need to inject between £25bn and £75bn more.  So far, the BoE has injected £175bn to try and stimulate growth. 

As many of our clients will know, we have shared the view of Goldman Sachs that sterling is undervalued for sometime now, however we anticipate this may continue in the near-term, particularly with the increased risk of further QE.  Although for a more in-depth analysis of your currency pair, please contact your Pure FX dealer directly. 

GBPEUR

Recently sterling has traded in a broad range against the euro as it has broke through key resistance levels but then back the other way, providing good buying opportunities for both euro buyers and sellers.  Both the BoE and ECB (European Central Bank) are likely to keep interest rates on hold for the foreseeable future but further QE by the BoE could lead to sterling weakness. 

GBPUSD (Cable)

Unlike the UK Q3 GDP figures released showed the US economy is now out of recession.  This lead to a weakening of the USD as confidence return to the markets and investors sold dollar-denominated assets which had been bought as short-term safe-haven.  Interest rates still remain at 0%-0.25%  

GBPCAD (Loonie)

The Canadian economy is recovering well as it emerges from recession with good growth and this has been reflected in a strong Canadian dollar.  The BoC (Bank of Canada) kept rates on hold at October’s meeting and it seems unlikely that there will be any change at the next meeting. 

GBPZAR

It is largely UK data which has determined the GBPZAR exchange rate recently, as little data from South Africa has been released.  Interest rates remained on hold for the third consecutive month and there was a story circulating the value of the rand may be frozen and the currency pegged which caused the rand to weaken sharply but when the Economic Development Minister said there was no basis to the story the currency soon recovered.

GBPAUD

A fairly modest amount of data last week in Australia is unlikely to change the Reserve Bank of Australia’s move towards higher interest rates.  The base rate was increased in October by 25 basis points to 3.25% and another increase of 25-50 basis points is widely expected when the Reserve Bank meet again tomorrow. 

GBPNZD (New Zealand dollar)

Despite Australia’s recent increase in interest rates the Reserve Bank of New Zealand has opted to keep interest rates steady at 2.5%, despite growth similarities between the two economies.  There has been little economic data recently and economists are keen for indicators as to when rates may start to increase. 

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.