Light at the end of the tunnel for weak pound

It's been a rough few days for sterling, which has dropped dramatically from its August highs of €1.22. However, as eurozone troubles refocus the market we should see the pound turn higher before year end.

A combination of factors has provided a catalyst for the pound's recent drop, namely comments from the Bank of England. The minutes from the Bank's latest meeting showed an increased willingness among its policymakers to extend quantitative easing.

Duncan Higgins, senior analyst at Caxton FX comments, "Quantitative easing is not a phrase that traditionally sits well with the pound and with the door very much open to the possibility; sterling may struggle to regain its poise in the short term."

Also adding to the euro's interim strength, is the noticeable pick up in confidence in the eurozone. Recently the major concerns; Greece, Italy, Portugal, and even Ireland, have received good demand at their respective debt auctions, suggesting that investor confidence is recovering from its record lows. With both the UK and US economies under the spotlight, the euro has become the main beneficiary.

"Even with Ireland reporting a negative growth figure for Q2, on balance investor confidence in the eurozone is higher than we have seen for a while. The euro has become the primary beneficiary of weakness in the US dollar, which is supporting the single currency against most of its peers," explains Higgins.

So for the short term it looks like sterling is going to struggle to get out of this present rut, at least without the help of heightened eurozone troubles. However, these are never too far away and we still expect to see sterling to trade comfortably above 1.20 before year-end.

Higgins concludes, "The market is particularly fickle at present and although the troubles of the eurozone have slipped out of focus, it's only a matter of time before they reengage the market's attention. We still see UK economic growth outstripping that of the eurozone in H2, which should support a climb back above €1.20 before year-end."