City analysts say rise in value of sterling is not vote of confidence in UK – but rather vote of no confidence in eurozone
Sterling climbed to its highest level against the euro in almost two years on Monday as concerns grew in the financial markets about the deepening crisis in the single currency.
A pound at one stage bought more than €1.23 on the foreign exchanges – making foreign holidays cheaper but UK exports to the single-currency zone more expensive.
Fears that “austerity fatigue” is setting in among voters were heightened after figures were released showing that Spain – the country thought to be next in line for a bailout – has slid back into recession.
The pound was also stronger against the US dollar, where last week’s weaker-than-expected growth figures for the first three months of 2012 were followed by a closely watched barometer of business in Chicago. Although figures last week showed the UK economy suffering from a double-dip recession, dealers are now anxious that the recovery in the world’s biggest economy is losing momentum.
City analysts said the rise in the value of the pound was not a vote of confidence in the UK but rather a vote of no confidence in the eurozone, where growth prospects are deemed to be worse than they are in Britain. Speculation that the Bank of England will be reluctant to expand its £325bn quantitative easing programme has also underpinned the pound over the past month, a period when pressure has mounted on bond markets in Spain and Italy.
Valentin Marinov, currency analyst with CitiFX in New York, said the next few days could be crucial for the pound because the monthly Purchasing Manager Index (PMI) surveys starting on Tuesday of manufacturing, construction and services would be closely watched for evidence that last week’s figures showing a 0.2% drop in gross domestic product in the first three months of the year gave a false picture of the true state of the economy.
“The reason for that is the fact that investors largely ignored the very disappointing quarter one GDP data released last week on the grounds that the PMIs were largely upbeat. Indications that the sentiment indicators declined more than expected in April could undermine to a degree market confidence that the UK growth figures will be revised significantly to the upside in coming weeks. In turn, renewed growth concerns could erode some of the interest rate advantage of sterling ahead of the regular Bank of England meeting and the release of the Bank’s inflation report in the next couple of weeks.”
Dealers are looking to see whether the pound can break through €1.24 against the euro, a level it has not reached since 2008, the year the UK began its deepest recession since the second world war. Sterling lost 25% of its value during the financial and economic crisis of 2007-09, making exports more competitive but adding to upward pressure on the cost of living through more expensive imports.
Further increases in sterling’s exchange rate will make it harder for the government to achieve its aim of export-led growth, an objective that has already been put in jeopardy by the sovereign debt crisis in the eurozone. The Spanish government on Monday said the economy contracted by 0.3% for a second successive quarter, while the authorities in Greece reported that retail sales in February were down 13% on a year earlier. Markets are also nervous about the results of the forthcoming Greek general election and the French presidential race.
Kathleen Brooks, a director at currency trader Forex.com, said: “The eurozone crisis is the key driver of why the euro has been weakening. The downtrack in the euro has been building up for a while. Things in the UK are not great, but in Europe they are worse.”
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