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What a week for the pound!  After a spell of inactivity akin to watching paint dry suddenly the GBP/EUR pair sprung into life.

The move started last Friday after we had further positive feedback from the US economy as existing home sales came in much better than forecast hitting 2 year highs; this data and a healthy economic assessment from Ben Bernanke boosted the good cheer in the markets. We are approaching the one year mark from the collapse in the financial systems and at the moment things are looking pretty steady and stable. However I personally feel that economic data will be closely scrutinized in the next quarter to look for sustainability in the markets and not simply a knee jerk response to extra stimulus. An article in the FT by Nouriel Roubini points to a threat of a double-dip recession if recovery turns anaemic- this would not be good news for sterling. 

The fall in the pound in the last week can be more attributed to sentiment with little fresh data from the UK, the sentiment being that the UK is diverging in its central bank policy from the ECB and the Federal Reserve. With a 3% drop against the euro are we seeing another period of sterling weakness? The signs are not looking too good for the beleaguered pound. Negatives are growing due to doubts that QE measures introduced have not had the required effect in the UK economy and with the door open for further expansion of the QE programme this does not bode well. With the prospect of rising unemployment, contracting growth and further stimulus being probed in an economy with hugely spiraling public debt then you can see why the market is bearish on the pound. However the market changes sentiment like a weather cock and the marginally better than expected GDP (Gross Domestic Product) number could kick start the pound back into life.

The Quarter 2 GDP for the UK came in better than expected at -0.7% against the expected -0.8%. Although still a poor reading the fact that it has come in better than expected will be a welcome relief for sterling following a week to forget. In the markets we have not seen a huge reaction to the news so far although we are up against the USD and the EUR from yesterdays lows. Crucially GBP/EUR has popped its head back over the 1.1363 level which is a key level in the markets and sterling has gained against the JPY and the USD- with a bank holiday in store for Monday we could see some profit taking in favour of the pound in the next week. 

Report by Phil McHugh

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