Can Sterling Build on Recent Gains? (01/07/10)

Can Sterling Build on Recent Gains?

On 29 June sterling hit a 19-month high against the euro as investors, analysts and world leaders continue to speculate about the future of Europe’s single currency. But how likely is this rally to last?

As markets continue to fret over the debt issues faced by eurozone banks, the pound has risen to 1.2389 against the euro, its highest level since November 2008. After months of weakness and with Britain’s economic recovery still fragile, what is pushing the UK currency upwards?

Well, the state of the European banking for one. Despite the fact that eurozone banks are managing to repay emergency loans from the ECB, many are still hampered by bad debts. Analysts have also noted that eurozone banks are accepting ECB loans at up to 1% above the interbank lending rate, which indicates that they are struggling to find funding elsewhere. As a result, investors are concerned about the region’s future and sterling has benefited from this uncertainty.

Future prospects

Fears over European banks aren’t the only factor pushing sterling upwards, however. The UK government’s deficit reduction programme has also helped the currency gain value and investors have been encouraged by speculation that interest rates may rise in the future, increasing sterling’s investment potential.

As such, the third quarter of the fiscal year will be a crucial period for EUR/GBP. For example, sterling’s continued success is largely dependent on the success of the government’s austerity measures and whether the Bank of England decides to raise interest rates. Similarly, the result of tests showing which eurozone banks are vulnerable to bad debts are due in September – information which will have a marked effect on the euro’s strength.

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Updated: 01/07/2010