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Sterling under pressure


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Bill Blevins is Managing Director of Blevins Franks. He has specialised in expatriate investment and tax planning for over 35 years. He has written books and gives lectures on this subject in Southern Europe and the UK.

THE FUTURE does not look promising for Sterling. Poor economic data and gloomy commentary from monetary officials are heaping pressure on the currency, causing it to fall to record lows.

On Monday September 1, the Pound slumped to 1.23 euros, the lowest it has ever been since the Euro was launched in 1999. It also fell almost one per cent against the US Dollar, to 1.80, the worst rate for over two years. This followed on from an 8.6 per cent slide against the Dollar in August, its worst monthly performance since the Pound crashed out of the European Exchange Rate Mechanism in October 1992.

The Pound began falling from around 1.48 euros at the beginning of last September. Since April it has, on the whole, stayed within 1.25-1.26 euros, so the further drop to 1.23 euros was an extra blow to British expatriates regularly converting Sterling into Euros.


On Saturday August 30, UK Chancellor of the Exchequer, Alistair Darling, created headlines with his gloom laden commentary on the British economy.  In an interview with The Guardian he warned that the economic downturn will be “more profound and long-lasting” than expected and that conditions were “arguably the worst they’ve been in 60 years”.  He admitted that he had had no idea how serious the credit crisis would become.

His comments echoed those by Bank of England deputy governor, Charles Bean, who, the week before, had warned that economy was facing a period “at least as challenging” as the 1970s. Darling’s observations were more surprising since Chancellors usually ‘talk up’ the economy or at least choose their words carefully to avoid making the situation worse.

Ian Stannard of BNP Paribas remarked, “Most people believed that things were probably deteriorating faster in the UK than the Government was admitting, but the fact that we’ve seen the Chancellor come out and admit that things are far worse have put Sterling under pressure”.

Sterling suffered not only because of Darling’s admissions, but also because of speculation of a rift between the Treasury and No 10 over the scale of the difficulties facing Britain. Some analysts believe the perceived division will cause the Pound to continue to fall over the coming months.

Intense pressure

Simon Derrick at Bank of New York Mellon commented: “Coming at a time when the Pound is already under intense pressure as talk grows of when the Bank of England will start cutting interest rates, this apparent sign of division in the political leadership has only served to sour sentiment further.

“With these tensions likely to overhang the much talked about ‘relaunch’ of Gordon Brown’s premiership and the possibility that the autumn will be dogged by political uncertainty, it also seems likely that investors will continue to shun the Pound for some time to come. We are reminded once again that when the Pound falls, it falls hard.”

Sterling’s woes were compounded by economic news released at the same time.  

A survey from Hometrack showed that house prices fell for the eleventh month in a row in August. The manufacturing sector had shrunk for the fourth consecutive month. Mortgage approvals fell to their lowest level since the data series began in 1993.

In the face of all this, it is perhaps not surprising that Sterling suffered as it did, with currency dealers scrambling to offload the Pound amid increased speculation that the Bank of England will be forced to cut interest rates this year.

Sterling’s freefall on September 1 meant it was 17 per cent lower against the Euro compared to one year previously.  It fell nine per cent between January 1 and September 1.


The currency began falling at the end of August, fuelled by a growing recognition among traders and foreign investors that Britain was heading towards a slowdown which would push the Bank to cut its base rate this year. The markets began pricing in the expectation that UK interest rates will be the only one to cut in 2008.  

Steven Barrow, currency strategist at Standard Bank, explained:  “It’s likely that the only major central bank to lower rates will be the Bank of England and that gives the market something to focus on and I think that’s what’s hurt Sterling.”

Experts began predicting that the rate would be cut a whole 1.5 per cent below its current rate to 3.5 per cent, by the end of 2009.

At the same time the US Dollar was rallying and speculation began as to how low it would fall against the greenback.  

Chris Turner, head of FX strategy at ING, said: “The Dollar has been in a bear trend since 2002. That is now reversing and we are now embarking on a four to five year Dollar bull market. The Pound will probably be supported at its current level of around 1.83 dollars for a while, but next year we forecast it will drop to the 1.65 dollars to 1.70 dollars level.

“Could I see it down at 1.50 dollars or below by 2011? Certainly I could. In any case, a two dollar pound looks to be gone for at least the next five years.”

Simon Derrick, currency strategist at Bank of New York Mellon, commented:  “Sterling has a history of falling very sharply against the Dollar… However, we expect it will bottom out at around 1.75 dollars.”

The Bank of England maintained interest rates at five per cent at their meeting on September 4, helping the Pound rally slightly against the Dollar, even though the decision was expected.

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