Sterling Slide

Another Sterling Crash!

Sterling took a huge tumble in trading again yesterday just when things looked like they may have settled and proved once again what a fickle beast the currency markets can be! In a double blow the pound slid against the Euro due to stronger than expected German IFO data (a measure of business sentiment) and hawkish comments by the ECB President Jean Claude Trichet and was dealt a second hammer blow after comments by members of the Bank of England’s MPC.

The Euro continued to strengthen against the Pound and the Dollar after comments by the European Central Bank’s Trichet that inflation in the 15 country Eurozone was likely to remain “significantly above 2%” for most of the year. This has led many to conclude that the ECB will be unable to cut interest rates any time soon (lowering interest rates tends to lead to a weaker currency and is one of the reasons why the Pound has slumped so dramatically recently following UK rate cuts in December and February). This was backed up by the release of this month’s German IFo (Ifo Institute for Economic Research at the University of Munich) data which showed that the business climate survey rose to 104.8 from 104.1, completely against the expected drop to 103.4. (For more information on the Ifo please visit http://www.cesifo-group.de/portal/page/portal/ifoHome/f-about/f3aboutifo)

In the same morning Mervyn King, the Governor of the Bank of England, and Charles Bean (both members of the Monetary Policy Committee which sets interest rates in the UK) were speaking before the Treasury Select Committee. Bean said “sterling is likely to move to the downside”. James Knightley of ING stated “Effectively we had Charles Bean saying that in all likelihood sterling will weaken…It’s very rare for a central bank to actually come out and admit that, so it’s going to be a signal that sterling is going to be falling over the next few months.” King then stated that tighter lending criteria would make interest rate cuts more likely- completely the opposite of the comments of his European counterpart and saw sterling tumble due to the prospect of more rate cuts.

After these comments the Pound dropped during the day by over 1% against the Euro, 1.4% on the Swiss Franc, over 2.5c against the Aussie Dollar and lost ground against the Dollar. The only good news for those of you buying Dollars was the announcement later in the day that US house prices dropped at an annual rate of 11.4% in January according to the Standard & Poor’s Case Schiller index. The news meant the greenback lost all its earlier gains. However UK figures from the NAEA (National Association of Estate Agents) show that the number of house buyers on estate agents books dropped 12% last month largely attributed to the current credit crisis resulting in people unable to get mortgages or unwilling to take them on.

To compound this misery for the Pound, the Financial Services Authority admitted it failed to supervise the actions of Northern Rock during its recent turmoil. This combined with the prospect of lower interest rates in the UK, and interest rates in Europe and Australia holding steady many of you would be wise to consider purchasing your currency to avoid risking even further losses. To put it bluntly if you were watching the rate over the last few months and decided that €1.35 or AUD$2.25 were too low then you may wish to think about what that decision has cost and make future decisions based on economic forecasts rather than blind hope! Forward contracts are still available to protect against any potential further losses so why not ask your account manager?

Dollar buyers would probably be wise to make funds available to move quickly given the way the currency pair has see-sawed on the back of the latest gloomy news either side of the Pond to take advantage of any spike. Either way keep an eye out for the fall out of the latest Bank of England bail out auction today!