Muted but positive response for sterling

Marc Cogliatti, Currency Strategist at foreign exchange specialists HiFX comments on the news that the MPC have cut UK interest rates by 0.5% to 1.5%: "The reaction in GBP has been broadly positive as the market is relieved that a more aggressive cut was not deemed to be required just yet. GBP/EUR is now 10 cents higher at 1.12, from the lows below 1.02 seen in December.

"The transition into a new year, following Sterling's pummelling in the FX markets last year has opened up the debate as to whether GBP is now too cheap and oversold or whether we will see much of the same again in 2009. For the time being the market seems to agree that Sterling is undervalued and GBP is coming back into favour. However the question remains: how long will this last? With Sterling still looking relatively cheap, we could well see the current recovery continue a little further before it starts to run out of steam although we must still remain respectful of the longer term downward trend."

Cogliatti concludes, "The news that the Bank have conformed to market expectations, and not cut rates as dramatically as they could have done, will come as welcome relief to all businesses with a foreign exchange exposure. Whilst the problems of a weaker Pound are obvious for any UK firm importing from abroad, the recent volatility in the foreign exchange markets has also made life very tricky for the exporters. Although the immediate reaction to today's announcement has been relatively muted, with the markets still relatively illiquid and nervous, volatility looks set to remain a key feature in the months ahead."