Currency watch: The only way is up

The market is dragging its heels but we are seeing sterling move away from the lows of early 2009 and talk of parity against the euro has all but ceased. Although we cannot rule out another dip for the pound, we are starting to see positivity creep in. The market is now starting to look to the future and the sentiment is that the pound and the UK will recover before the Eurozone.

Focusing on the Eurozone, last week we saw the European Central Bank (ECB) cut interest rates amid recent dire economic data with unemployment rising, GDP contracting and inflation falling throughout the Eurozone. The market wanted to see more aggressive action by the ECB; time will tell if the ECB is correct but sentiment is turning against its lack of action. Structurally, the Eurozone has problems, the feel-good factor following the G20 summit is waning and it’s back to the bleak reality of weak data and vulnerable Eastern European banks.

ECB committee member Stark recently noted: “It will take some time until market participants and the general public regain confidence in the banking system.” Meanwhile, Ireland’s finance minister Brian Lenihan noted that the reason behind Ireland’s sharp contraction is the strong currency area’. Looking forward, economies throughout Europe will welcome a weaker euro to boost trade and, slowly, this may become a reality.

So where are we heading and when? I believe, in the next two months, we will hit 1.15 on �/€ and 1.25 on €/$ and am confident that 1.25 on �/€ will be achieved within six months.