by Jon Beddell
Sterling has continued to outperform the Euro over the last week as sovereign debt stories dominate the news wires. The pound took a blow yesterday when ratings agency Fitch said that the UK faces a “formidable” challenge in reducing the deficit and stabilising government finances. However, markets were not unduly effected because this is nothing new. The prime minister has been voicing similar concerns, leaving markets torn between punishing the pound for our weak financial situation, and rewarding the currency because at least the government are aware of the challenge and are expected to take steps aimed at addressing the deficit in the emergency budget due on June 22nd. On balance, sterling is being given the benefit of the doubt, especially when compared to the Euro. The recent €750bn rescue package did little to calm markets because it’s aimed at filling a hole rather than addressing long term structural concerns. ECB chairman Jean Claude Trichet is speaking later today ahead of tomorrow’s ECB policy meeting. Markets will be watching closely for any additional measures to shore up the Euro, or for signals or comments that could impact sentiment toward the single currency’s problems.
Today’s chart shows the Sterling / Euro exchange rate from March 2008 to present. There are two key levels at work at the moment. Sterling captured the key 1.1900 level last week, and has spent the last few days cementing that victory which is certainly good news; but our second level, 1.2142 is still presenting a significant barrier. That level was an important peak back in November 2008, and if the pound could manage to progress above there we would be optimistic that a further rally up towards 1.2800. We remain positive on Sterling’s near term prospects, but clients with Euro requirements should strongly consider “locking in” some of the recent gains by hedging at least half of any exposure now.
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