Sterling under pressure due to fragility of UK economy

Published: 05 April, 2011

A steady start to the week for sterling gaining slightly against the euro and the US$.

Currency rates - April 5

EURO/GBP - 1.1377

US$/GBP - 1.6149
CHF/GBP - 1.4907
CAN$/GBP - 1.5637
AUS$/GBP - 1.5634
ZAR/GBP - 10.8790
JPY/GBP - 134.218
HKD/GBP - 12.5608
NZD/GBP - 2.0997

SEK/GBP - 10.2734
US$/EURO - 1.4192

A survey by the British Chamber of Commerce highlighted the fragility of the UK economic recovery with cash flow and price pressures being key constraints. The good news was that export activity continued to be strong. The oil price, in sterling terms, has reached a record level which is another pressure on the UK economy; businesses and consumers will suffer. Sterling is under pressure and will remain so for the time being.

Yield on Portuguese debt is approaching 10%. Clearly unsustainable and the expectation is that a bail out must come sometime soon. However the problem is that there is an interim government in place in Portugal which makes any decision making very difficult. The effect on the euro is minimal as the market awaits the European Central Bank meeting on Thursday and the expected 0.25% rise in interest rates. This is the reason for euros strength against sterling and the US$.

The rhetoric has changed in the US with talk of the need for an exit strategy from the programme of ultra loose monetary policy [quantitative easing and low interest rates]. But there are still concerns about the robustness of the US economic recovery.

The Australian dollar has hit a 29 year high against the US$. The main driver seems to be the use of the Australian dollar in the carried trade [where a low yielding currency funds the purchase of a high yielding currency]. The opposite effect is that the yen is losing ground.

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