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Sterling claws back ground from the euro
5 Jan 2009Foreign exchange traders were today putting their money behind sterling in the first signs of a fightback for the beleaguered British currency.
The pound jumped 2.5%, making it worth €1.0677, and also rose 0.2% against the dollar to $1.4491.
Ian Stannard, senior currency strategist at BNP Paribas in London, said: “In the near term we can expect quite a significant bounce for sterling. The fall in the pound was exaggerated and overextended in December. We see sterling pulling back quite sharply.”
Henrik Gullberg, senior foreign exchange strategist at Deutsche in London, agreed: “Sterling looks very undervalued. It is way below where it should be against the euro, if you look at the fundamentals.”
Traders said that the pound, which sank close to parity against the euro in the run-up to Christmas, could rise by as much as 10% by the end of January to above €1.12 . While experts were less bullish about sterling against the dollar, Stannard said: “I wouldn't be surprised to see sterling hit around $1.50-$1.52.”
The turnaround in sterling's fortunes came despite the fact the Bank of England is expected to cut interest rates by at least half a percentage point on Thursday from the current 2% level. Traders said a cut was already priced into the value of sterling.
Reports that the British Government may guarantee the market for asset-backed securities to improve bank lending also gave a fillip to sterling.
Stannard said the euro was sliding on fears for the eurozone: “We know already that things are bad in the UK but the market is only just waking up to what's happening in euroland. We think the European Central Bank is going to have take more aggressive steps [to cut rates]. The ECB has dragged its feet.”
The ECB may find it easier to cut rates when it meets on 15 January after inflation figures today showed prices fell by more than expected in Italy and Spain in December.
Analysts pointed out that some of the euro's unexpected strength came from European banks repatriating euro funds to settle accounts by the year-end.
Reader views (2)
The British economy needs a weak pound as it boosts exports, reduces imports and thus balances the excessiv trade deficit. The interests of the expats or holiday makers are rather irrelevant for the broader British economy.The expats can come home, and holidays can be spent in the beautiful areas in Britain
- Johann, Berlin, 05/01/2009 18:22
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Dear Sir/Madam,
I hope and pray that sterlings's revival will be lasting as this brings enormous relief to the expat community in the Euro Zone. We hope for some increase in its value, but, of course it will not proceed to the level it was several months ago. If it lasts it will be a wonderful New Year's present.
- Arthur Lincoln, Roeselare, Belgium, 05/01/2009 15:22
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