Sterling Takes A Pounding

Sterling Takes A Pounding

12:06:00, October 01, 2007



The British pound has weakened significantly against the euro and Swiss franc in recent weeks and remains vulnerable on the back of softening domestic economic conditions.

The effects of monetary tightening in the U.K. are finally being felt. The housing market has begun to roll over, asking prices are not being met outside of London and the buy-to-let market looks particularly vulnerable given the negative cost of carry. Inflation is in retreat and retail sales growth will follow the slowdown in house price appreciation. Furthermore, the U.K. remains reliant on short-term capital flows to fund its current account deficit, and terms of trade conditions have been deteriorating for some time.

Bottom line: Whether or not the Bank of England actually eases policy, sterling could remain under downward pressure as the U.K. economy continues to slow and speculation about base rate reductions mounts in the coming months.

Normxxx    
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