Euro Update

A year ago, due to the credit crunch and prospect of a global depression, investors jettisoned anything smacking of risk and hoarded their cash in safe-haven currencies.

Sterling had been out of favour for a year already, particularly since Northern Rock had gone down the tubes. Having spent the first half of 2007 around €1.50 it had fallen to between €1.30 and €1.25 by March 2008. After six months in that range it tanked again in the autumn as international bodies such as the World Bank and the IMF predicted gloom and doom for the UK economy. It came perilously close to one-for-one with the euro on New Year’s Eve.

The story back then was that Britain's recession would be deeper and longer than anything that might happen to the Euro zone. The turn of the year brought a change of mindset. The financial system had not collapsed. The worst appeared to be over and investors tiptoed out of their shelters. The euro was better-positioned than the pound in interest rate terms; the European Central Bank's policy rate is 1.0% where the Band of England's is 0.5%. But sterling had been trashed; the euro had not. Investors saw the possibility of a recovery for the pound and they wanted in.

As the year progressed, it became clear that the UK economy was doing nowhere near as badly as the doom-mongers had predicted. In fact it is performing better than the euro zone on several fronts. Most strikingly, British companies report that business is improving, whilst in Europe firms will only concede that things are getting worse more slowly. Also, the UK is faring better than some with unemployment – Britain's 7.3% rate is considerably less nasty than Euroland's 9.2%.

We have seen the pound fail to break above the year’s highs over the last couple of weeks with it drifting back to a level close to €1.16 we may now see sterling struggle to make near term progress.

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This article submitted by Moneycorp