Sterling reached a five month high against a broadly weaker euro, hitting a day high of 1.1625 this afternoon.
Mounting worries about sovereign credit risk within the euro zone have undermined the euro, as tumbling Greek government bonds highlighted the markets concerns over their ability to pay back its soaring deficit.
Sterling was also bolstered by Bank of England MPC member Andrew Sentances bullish comments yesterday, says Mark Bolsom, head of the UK Trading Desk at Travelex, the FX payments specialist. The markets took comfort in his apparent assurances that Quantitative Easing will not be extended past its current level of 200 billion.
Despite Sentances comments, I still think a double-dip recession is a strong reality and shouldnt be rejected, says Bolsom. It is an undeniable fact that both the government and Bank of England have pumped in unprecedented levels of stimulus into the economy and it has grown only marginally. And because of our huge deficit, we expect a real tightening of fiscal policy after the general election. The situation stands to get far worse when stimulus is withdrawn we can see already that retail sales are already slumping now VAT has returned to its former level. The real question is what will happen to growth after the stimulus is withdrawn? I wouldnt go as far to say return to recession is inevitable, but I would say it is a strong possibility.
Most Euro zone states will be pleased with a weaker euro as it helps their competitiveness in foreign markets, says With regards to a broadly weaker euro, Bolsom. Certainly, Head of the European Central Bank, President Trichet, has been vociferous in calling for a stronger dollar against the euro.
D.C.