A poll conducted by Reuters News Agency has found that sterling is expected to maintain its comparative strength against the dollar and euro for a year.
The results of the poll indicate that the perception of sterling as a comparative safe haven will be maintained as the euro-crisis continues to affect the standing of the common currency.
Raghav Subbarao at Barclays Capital stated: ‘Within the European currencies sterling will be fairly well supported.’
Of course a great deal depends on how the euro crisis progresses. If a Grexit or a full Spanish bailout occurs the whole situation could change. The euro-zone did escape recession earlier in the year but through stagnation in the first quarter rather than growth. A subsequent succession of dismal data has led economists to revise predictions with the majority forecasting second and third quarter contraction.
Although currently Britain’s economy is hardly fighting fit, strategists have taken into consideration the fact that Britain has an independent central bank and thereby possesses the ability to produce limitless amounts of money. This makes sterling more attractive for investment purposes.
Peter von Maydell of Credit Suisse explained his take on the situation. He asserted that: ‘The BoE’s ability to monetize has been viewed increasingly less negatively, and is now increasingly seen as a factor benefiting perceptions of UK sovereign risk relative to the euro area.’
In a poll of over 60 analysts the general consensus was that the pound will be worth $1.54 in six months time and $1.57 in a year. The results also indicated that sterling will stay stable against the common currency, with one euro worth 79p in both six and twelve months. These predictions have hardly varied from those made a month ago.
However, this poll was taken prior to the release of data which revealed that last month Britain’s manufacturing sector contracted at its fastest rate in over 36 months.
Over the second quarter Britain’s economy shrank by 0.7 per cent, a much greater contraction than was expected.
The BoE brought its planned total spend to £375 billion by injecting its quantitative easing programme with £50 billion in July, and there are expectations that a further £25 billion will be added in November. Despite this, and hopeful predictions of an Olympic boost, the outlook for growth remains cautious at best.
Although the intent of the spending programme currently deployed by the BoE is to kick-start growth by inserting freshly minted money into the economy through bond purchase, such action would theoretically weaken the currency. However, analysts such as Maydell of Credit Suisse have dismissed this notion: ‘We don’t expect the BoE’s decision to increase its asset purchase program by £50 billion to weigh on the pound.’
Christian Lawrence of Rabobank attributes much of sterling’s stability to a reduction in dollar strength. He states: ‘Much of it is a case of dollar weakness. With the fiscal cliff approaching next year, market focus will turn squarely on to that and we will see an underperformance of the dollar.’ If lawmakers are hesitant in taking preventative steps by the end of the year the U.S. will face a ‘fiscal cliff’ of steep tax increases and spending cuts.
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