Pound still vulnerable, despite best Euro rates since Oct 2010

The economy remains at risk of recession despite a surprise pick-up in activity among services firms in December. Services and manufacturing data this week have given the Pound a boost, with the best rates for buying Euros since October 2010, but the threat of a recession and more monetary stimulus from the Bank of England still loom large.

If the UK economy were to fall back into recession, OR the Euro crisis is resolved, OR we see more Quantitative Easing, sterling is likely to fall back.

The Eurozone debt problems, along with surprisingly good UK data this week and fresh worries about Eurozone banking stability, have kept exchange rates relatively high, particularly against the Euro. But if Greek austerity measures are passed later in the month, and QE is extended in February, the Pound would come under severe pressure.

Against the US dollar today, exchange rates fell as the dollar gained strength from better than expected jobless data, and President Obama’s surprise cuts to the US defence budget.