Wednesday, February 4, 2009

Pound Recovers Against Euro

I have felt that the Pound's depreciation against the Euro was beginning to look overdone. January saw the Pound recover with the Pound showing a record monthly gain to 0.88 to 1 Euro

It is true that economic fundamentals of the the UK remain weak:
  • Deepening recession - sharpest recession in OECD
  • Low interest rates and likely to fall further
  • Housing and mortgage slump
  • Rising government debt
  • Banks needing bailing out
However, the Eurozone economy has very similar problems and in some situations looks worse. E.g. countries like Greece and Italy have had their government credit ratings reduced. Ireland was warned it may be next.

The recovery of the Pound was also helped by a recovery in mortgage approvals. This is a key element to the economy. If the housing market shows recovery and limits the fall in house prices, we might start to see the real beginnings of an economic recovery.

However, before we get too excited, it is worth bearing in mind.
  • Mortgage approvals are still very low. The January improvement was against a backdrop of record lows.
  • One months improvement is still tenuous recession. This economic crisis has a tendency to get worse just when you least expect it.
  • There is little that can be done to prevent the most serious recession since the war. Against this backdrop, interest rates are still likely to continue falling towards 0%
  • The UK face a complex set of factors which make recession deeper in UK some analysts are still suggesting pound could fall to $1.2.(bloomberg) However, George Soros has said he has stopped shorting the Pound (selling)
  • I am writing this on Monday for publication on Wednesday, if I know my luck for predicting exchange rates, the Pound will have collapsed on Tuesday or something....

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