| 2010: A sterling positive |
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| Written by Jon Beddell |
| Tuesday, 26 January 2010 15:10 |
"At TorFX we entered the New Year with optimism, taking a comfortably contrarian stance on the pound's prospects for 2010."___________________ It's official. The UK economy grew in the fourth quarter, but only by the finest of margins. The markets were expecting 0.4% growth, so were somewhat disappointed with a 0.1% figure. The pound duly lost a cent against almost any currency you care to mention. Interest rate expectations have been in a state of fibrillation over the last few days. Hawkish comments from MPC member Andrew Sentance had some investors pricing in a rate hike as soon as April/May, but today's sluggish growth data has thrown that back to Q3 / Q4 2010, and at the same time has dented sterling's robust performance. At TorFX we entered the New Year with optimism, taking a comfortably contrarian stance on the pound's prospects for 2010. So much doom and gloom in the media, and yet sterling had actually done a fair job of holding its value (at least against the Euro) in 2009. We reached a high of 1.19 in June, and since then have managed to stay well away from the December 2008 low at 1.02. Last week sterling ended the longest winning streak in years by rising seven days on the trot, a rare feat in foreign exchange markets. Of course, much of sterling's sure footedness is down to Euro weakness. Concerns over the Greek economy, and shifting perceptions over the relative strength of economic recovery here compared to the euro zone have helped sterling pull ahead. We have good reason to believe that this trend will continue over the next few weeks, but further out we are concerned that the general election will weigh on sentiment in the second quarter. Looking even further ahead, interest rates should rise faster in the UK than in Euro land, where lower inflation and concerns over Greece will require a more cautious approach. That should be sterling positive. Right now, sterling has a window of opportunity. The end of quantitative easing is almost certainly in sight. We may get a pause rather than a clear "line in the sand", but either way we should be better informed following the next Bank of England meeting on February 11th.
The markets would probably take either event in a positive light. A clear end to QE would help to prevent the kind of devaluation that's keeping many investors on the side lines as far as the pound is concerned. On the other hand, a pause would give a green light to short term sterling bulls, while also reassuring the markets that the door has been left open should the recovery falter. 
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