STERLING STILL VERY TENSE AS QUANTITATIVE EASING PRICES EMERGE

STERLING STILL VERY TENSE AS QUANTITATIVE EASING PRICES EMERGE

As anticipated, prices on Sterling pairs relaxed yesterday. GBP/EUR and GBP/USD both drifted slightly upwards as a proportion of big speculative positions being run against the UK currency were closed in the absence of any further major market negativity. Market close saw both pairs left fairly unchanged on the day though at 1.0850 and 1.3850 respectively. In terms of data, the morning did see UK Manufacturing Production, although this didn’t manage to prompt any further heavy staking of positions, despite the figure showing an unbelievably steep contraction of -2.7% in February.

The Manufacturing figure is extremely troubling though, especially given the case continually made by the Government until very recently that Pound depreciation and a competitive UK export sector would heavily support industry this year. If, as we all already know, financial services are swallowed up in the Government’s debt-riddled black hole of bureaucracy, then it is the country’s strength as an exporter that is going to be put to the test in terms of GDP output for coming years. The balance between the two is clearly shifting, and, unlike say Germany, which has a history of comparative advantage for its extremely high quality industrial equipment, the UK quite simply has fairly little to offer. A culture of consumption driven by a hyper credit bubble and an almost complete reliance on global services has left the UK looking pretty naked and alone in the current climate where cash is being hoarded and debts are being called in on a global scale.

So the current question of the moment is with regard to the short and medium-term trajectory of the Pound. The bigger picture is that the UK’s balance sheet is currently ballooning with all variety of defunct credit instruments and new gilt-based debt, all being replaced by fresh notes straight from the printers. This could be good for currency value – if investor belief is that it will kick-start an economy to action. It could though, be very bad for currency value if the view is that the debt is being created but can never be easily serviced or repaid. On the short-term, the current mood is dictating the latter, but on the longer term the former will probably be the reality.

The rest of the month sees a whole smattering of data from the UK, all of which will be bad, with very little from Europe. GBP/EUR can therefore be expected to move between 1.06 and 1.13 for March-April. Onwards from April will be likely to yield upwards of the 1.15 mark as the European Central Bank moves its effective base rate to zero and considers some type of quantitative easing for the summer. From then on, making the assumption that London can still maintain status as the global financial capital, higher rates could be possible. GBP/USD will probably take a fairly similar root, but will be under much more pressure from a continued Dollar strength as the Euro continues to take the strain.


Rapahels Bank CFX Team
0800 587 8722
cfx@raphael.co.uk
www.raphaelsbank.com/cfx

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