Sterling has stabilised against the dollar and euro following recent steep losses sparked by fears over the weak British economy.
A pound now buys €1.161 (86p) or $1.55 (64p) on the currency markets – but it remained close to this month’s 15-month low against the euro and a seven-month low against the US dollar in late morning trading.
Today’s modest recovery was briefly shaken by a surprisingly upbeat German ZEW survey, which showed a spike in investor morale to its highest level since April 2010. However, sterling eventually regained its small advantage against the euro.
The pound has weakened of late due to the ‘Carney effect’ – the view that the new Bank of England governor will be more tolerant of inflation than Sir Mervyn King.
Yesterday’s fresh losses were also sparked by a speech at the weekend by monetary policy committee member Martin Weale. He said sterling may need to weaken in order to rebalance the economy and help exporters.
The pound has been under pressure in recent weeks due to worries over the feeble economic recovery, with Britain expected to lose its AAA credit rating this year.
George Osborne is likely to be forced to admit he will miss his target for reducing public debt and in his quarterly inflation report last week King warned of fragile growth and above-target inflation.
Mark Carney recently pointed out that the UK’s export performance has been the worst in the G20 since the turn of the millennium. Hedge funds and other speculators have been betting that the pound will fall further by taking short positions. Sterling is the most ‘shorted’ currency after the yen.
Simon Smith, chief economist at FxPro, said the Bank is ‘building a background against which longer-term investors are likely to turn their back on the pound’, adding that ‘their faith that it is a decent store of value against other countries’ is ‘seriously dented’.
The prospect of currency wars – where nations engage in ‘beggar-thy-neighbour’ devaluations in an attempt to boost their own exports – is alarming policymakers.
The G20 at the weekend issued a statement from its Moscow meeting that declared a commitment to avoiding currency disputes after Japan embarked on an expansionist policy to drive down the yen.