Can Sterling continue its recovery?

The G20 summit and the subsequent $1.1 trillion agreement designed to tackle the global financial crisis appears to give Sterling significant strength against most major currencies, hitting one month and two month highs against the Euro and Dollar respectively.

The UK government may have to find an extra GBP39bn a year by 2016 to bring borrowing under control according to the Institute for Fiscal Studies (IFS). This is on top of the GBP38bn of fiscal tightening the chancellor announced in the pre-Budget report. Alistair Darling who is due to present his Budget on 22 April warned that the recession will be more severe than forecasted. This news (and any further negative data, statements or rumours) between now and the budget could weigh heavily on Sterling, causing rates to slide and the positive movement we have recently seen disappear.
UK manufacturing production has fallen for the 12th month running, the longest stretch of losses since the 1980 recession. Although the fall was less than expected, analysts said that the data pointed to deep weakness in the economy. The continuing decline highlights the UK economy is still performing very poorly –This means that UK interest rates are likely to remain at these lows for some time.
The European Central Bank has expressed carefully worded concern that countries should not seek a competitive advantage over other member states by deliberately maintaining a weak currency. The Pound has dropped by over 25% on a trade weighted basis against the Euro and some feel it may be part of a deliberate policy to help UK exporters over their European counterparts. Without naming the UK specifically, Lorenzo Bini Smaghi, a member of the ECB’s executive board, reminded EU states outside the single currency that they had to treat their exchange rates as a “matter of common interest”. If this continues, then political pressure may increase on the UK government to do something about the value of the pound.
On the 2nd April we saw the European Central Bank (ECB) cut its official interest rate by 0.25% as it steps up its efforts to combat Europe’s economic recession. This move brings the ECB’s interest rate, which has fallen 4.25% since October, to a new low in the 10-year history of the EURO. In a press conference following this announcement, ECB President Jean-Claude Trichet suggested at least one more quarter-point cut to 1% is likely in the near future stating the current level is “not the lowest limit”.
Price action in the market today has seen the Euro hit multi month lows against Sterling Canadian & Australian Dollars respectively the market looks like it is running out of patience with the ECB monetary stance and it’s now obvious the ECB will begin Quantative Easing very soon.

So Europe is widely expected to fare worse this year than either the UK or the US. This is backed up by Ireland’s unemployment figures increasing by 2% and by the Spanish jobless figures in March rising 57% against the same time last year. Germany without any kind of global pick up will fall into stagnation and Sovereign banks are in the process of diversifying reserves out of the Euro into sterling and Australian Dollar A break below EUR/USD 1.30 could signal a prolonged sharp Euro sell off against all major currencies.

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