Sunday, August 16, 2009

Pound Sterling Future

At the end of 2008, some were fearing a collapse in the Pound, suggesting it was finished as a currency. I felt these fears were exaggerated. (Run on the Pound - What's the Panic?) (Is Pound collapsing?) True, the UK economy has significant problems, but, the UK is hardly unique in facing high government borrowing, a deep recession and the need to pursue quantitative easing. At the end of 2008, I felt the Pound would stabilise and recover a little. There were good reasons for the weak pound in 2008, but, they had been overdone.

In 2009, the Pound has recovered, showing that even economists can be right occasionally. Now the Pound has recovered, it is closer to its fair value measured against purchasing power parity.

The future outlook for the Pound looks more uncertain. The rise of the pound this year was hardly a reflection of underlying strength of the Pound. It was more due to the relative weakness of the other countries.

With France and Germany showing signs of emerging from recession, investors may start switching back into Euros as they benefit from the greater security the Euro offers. So far, the UK has been able to sell its public debt without causing too much angst in the financial markets, but, if we continue to have budget deficits of over 10% of GDP, that may soon change.

I feel the Pound will remain relatively weak in 2009 and 2010, which is at least good news for the UK tourist industry and export industry.

Definition Pound Sterling ERI = Pound Sterling Exchange Rate index. This measures the value of the Pound against a basket of other countries. It is trade weighted which means it places greater emphasis on currencies which play a greater role in UK trade

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