Sterling recovers but uncertainty ahead

22 May, 2012

Graham Harborne

After falling to a 2 week low against the euro, sterling managed to make a small recovery as investors resumed their cautious approach towards the euro. With the outlook for the eurozone still of great concern the pound picked up in the afternoon, though any gains seem limited for now as there is still a risk of further quantative easing by the Band of England which we will get a further insight into with the BoE minutes that are due for release this week.

With Greece’s membership of the 12 nation currency bloc still top of the worries fresh concerns of the state of the Spanish banking system added to the euro’s woes, though many investors are convinced that a failed euro will have a hugely damaging affect on the UK economy.

“If we get some form of contagion (in the euro zone) sterling will benefit from that relative to Europe, but the UK economy will also be affected. It’s a bit of a double-edged sword,” said Lauren Rosborough, currency strategist at Societe Generale.

Against the USD we have seen sterling fall 3% in as many weeks as the greenback continues to be the safe haven currency for many investors. There could also be scope for further dollar strength and experts will be looking at the string of UK data releases due this week to see if a further round of monetary stimulus is in the pipeline. BoE policymaker Adam Posen said late last week that he may have been premature in dropping his call for additional stimulus last month, because the underlying economy may be weaker than he thought earlier this year. It was his opinion that further QE was not necessary that had helped boost sterling so with his change of heart we could well see the opposite.

“Cable [US Dollar exchange rates] could ease towards $1.55 and even $1.53 primarily because of the dollar’s strength and also because the BoE’s stance has not really changed,” said Saxo Bank’s Hardy.

Tough times in the currency markets, especially for those of you needing to achieve certain price levels for your foreign exchange. With the markets being so volatile at the moment it is worth thinking about stops and limits as well as forward contracts to try and achieve the levels that you may be looking for. Speak to your account manager here at Currency Index to try and ensure you don’t miss out on the rate of exchange you require.