Last week saw a huge swing for the sterling dollar cross. After the previous weeks high of $1.6178 sterling fell to its lowest levels in six weeks before rallying and gaining 1.5% to claw back the deficit. In this week’s report we will take a closer look at the events which caused the move and what is predicted for exchange rates in the coming weeks.
Early last week we saw the pound fall to its lowest levels since the beginning of September, hitting a low of $1.5919. The move tracked a fall in the euro against the greenback as falling stock futures in the U.S prompted investors to sell riskier currencies and head back to the safe haven of the U.S dollar.
However, the gains for the dollar did not last as there was finally some positive news for the UK economy. Last week saw the release of the UK GDP figures which confirmed that the UK had finally climbed out ofrecession with better than expected data. Official figures from the Office of National Statistics showed the UK economy had grown by 1% in the 3rd quarter beating estimates of 0.6% which pushed cable back over the 1.61 mark.
Although at first glance it looks great for the UK, the higher figures can be put down to a couple one off events. Olympic tickets sales are believed to have boosted the economy by 0.2% and with the extra bank holiday for the Queens Jubilee, the figures seemed enhanced when compared to the previous quarters. In the next couple of months the data will be revised and it is possible we could see the growth figures reducedwhich could again cause some volatility in the currency markets.
Despite the positive news last week concerns over the UK economy will remain as we are still seen as being vulnerable to the troubles surrounding the euro-zone, especially as they are our largest trading partner. As a result the majority of market analysts expect sterling to struggle to reach the 1.63 mark we saw earlier in the year. There is also the growing speculation to whether the Bank of England will opt for further stimuluswhen they meet next week. Last week BoE Governor Mervyn King said the central bank were ready to injectmore cash into the economy if the recent positive signs fade.
If policy makers were to add to the £375 billion they have already pumped into the UK, we could well see sterling lose the ground it made against the dollar when Fed Chairman Ben Bernanke agreed to add $40 billion per month in to the U.S economy for the foreseeable future.
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