The “Sterling Crisis” that never was
When the results of the May General Election were finally confirmed and it was clear that no one party had an overall working majority, GBP/EUR plummeted 4% from 1.1845 to 1.1350 and GBP/USD fell 3% from 1.4935 to 1.4475 in just one day (7 May).
Since Cameron took power 100 days ago, GBP/EUR has risen 7% to 1.22 and GBP/USD has also rebounded 8% to 1.5630 since May 7th 2010. Sterling reached a 19-month high in June against the Euro reaching 1.2394 and a 6-month high against the Dollar at 1.6002 just this month.
Andrew Scott, currency dealer at foreign currency exchange specialists HiFX comments "There are always two sides to any story, particularly in the currency markets, and how much of this recovery is down to Cameron et al is, as always a topic of debate. However, despite concerns over the UK economy's growth rate when the coalition government was elected and CEBR forecast that the pound and Euro could hit parity, sentiment towards Sterling has improved as pressure mounts on other currencies. With the new government appearing to be holding together well, along with budget cuts initially protecting the Pound's credit rating, it seems that investors have started to look at the UK differently. This positive news for Sterling, set against the backdrop of continued Euro downgrades and fears of a double dip US recession, has put the Pound into the limelight as a potential safe haven currency.
"If the recent recovery Sterling has enjoyed is to be maintained, limiting the ‘fallout' from government spending cuts coming to a town near all of us soon and ensuring that the cuts don't send us back into a recession will be key. With the recent releases of UK GDP growth at 1.1% from April through June, almost double market forecasts of 0.6% and the number of people unemployed falling by 49,000 over the same period, it's clear that the green shoots so often talked about are beginning to take hold. But the government will be under no illusions how much work there is still to be done. Sterling could well come under pressure in the coming months particularly if the UK's economic outlook deteriorates any further."