Sterling’s time to shine
STERLING might not have become the darling of the FX markets but it has certainly shed its image as their whipping boy. In what has been described as an ugly contest between the G4 currencies (US dollar, sterling, euro and yen), the pound is looking the rosiest.
Last week’s GDP figures, which showed stunning growth between April and June, has certainly given sterling a boost – the pound rose to its highest level against the dollar since April yesterday, hitting $1.5520. In contrast to Britain, US economic data has been far from buoyant with jobs figures, housing data and leading indicators all raising fears of a double-dip in the world’s largest economy.
And although concerns about the impact of the coalition’s austerity measures have not vanished entirely, the strong second quarter performance has given more credence to the likes of Monetary Policy Committee (MPC) member Andrew Sentance, who has now twice called for a rate rise to fight stubbornly-high inflation.
RBS’s Melinda Burgess says: “The stickiness of inflation and the stronger-than-anticipated pace of growth will raise expectations – wrongly in my opinion – of earlier rate hikes from the Bank of England. With the market trading on interest rate differentials, this will support sterling.”
“The UK now looks to be on a better footing heading into this period of austerity, implying that while spending cuts and tax rises will have a negative effect on the economy, a double dip recession looks unlikely. Sluggish but positive growth is the more likely scenario.”
CMC Markets’ Michael Hewson agrees but notes that we could see an interesting fourth quarter GDP figure as consumers try to bring forward spending on big ticket items ahead of the VAT hike to 20 per cent.
Sterling yesterday struggled to make it past the solid resistance level at $1.5533 despite a strong CBI retail survey. This is about fair value for the dollar, reckons Hewson, who sees sterling-dollar continuing to trade between $1.50 and $1.60 with the risks to the upside. However, he thinks that we could see sterling drift back to the $1.52 to $1.53 level without negating the upward momentum in the pair. Currency traders should therefore look to use these short-term pullbacks to buy. Hewson is also bearish on the euro against sterling. He admits we have recently seen a bit of a squeeze but thinks that while we remain below £0.8420, we could see a break of £0.8320 and then even to £0.80 as sovereign debt risks and financial stresses continue to take their toll.
For now, the pound is putting in a sterling performance at the G4 beauty contest. Make the most of its lustre while the summer sun continues to shine.