The Euro and the Pound – to have and have not.jpg

The Euro and the Pound – to have and have not

By: DAVID JOHNSON

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David is a Director of Halo Financial Lt, a company which provides exceptional exchange rates and foreign exchange information for currency transactions involving migration and overseas property investment as well as services to companies involved in international trade.

THE QUESTION on everyone’s lips is, ‘what will happen to the Pound?’ The UK economy is sliding, house prices are slumping and yet energy and food costs are ramping ever higher.

Logically, when their remit is to restrain inflation to the exclusion of all other concerns, the Bank of England should be raising interest rates in an effort to cut retail activity and rein in inflationary pressures. They would have every justification with Consumer Price Inflation currently 3.0 per cent but they clearly would find it very hard politically to do that while the risk of recession is so great.

The Bank of England has its hands tied by inflation concerns; with such a narrow remit, they have to sit on their hands and that is precisely what they are doing. Their monthly inflation report pointed to sharply slowing growth but warned of inflation breaching 4.0 per cent in the months ahead; and so the dread spectre of ‘stagflation’ reared its frightful head and traders ran for cover, discarding all their Pounds on the way.

It is difficult to see how Sterling can fight its way out of this tight spot in the short term. The factors in play are all long term problems; the UK housing market is long overdue a correction, although it is almost heresy to say so; average house prices have, after all, trebled in the last decade leaving first time buyers unable to scrape together the necessary deposit but offering heaps of equity to those already on  the ladder. As a consequence, debt-against-property value has snowballed, fuelling a sharp upturn in the European Property markets as UK buyers flood in, prompting a retail spending melee which has left UK consumers with unsustainable levels of debt.

If the UK was in a glass ball, immune to global influences, this would be enough to contend with but the fact is that the global economy is slowing too. Financial markets are understandably risk averse with US sub-prime debts forcing banks and financial institutions to be far more cautious and making loans harder to come by. Equally, international investors are seeking safer alternative homes for their money with gold and the Swiss Franc being prime targets.

As a result of these problems, the UK is forecast to have lower interest rates in the year ahead, resulting in Sterling missing out on investments flows. That money is tending to find its way either into safe havens like gold and the Swiss Franc or high yielding currencies like the New Zealand Dollar which appear more insulated from the US economic slowdown.

So there doesn’t appear to be a quick fix for the UK economy or the Pound. We may well reach 2009 with Sterling still wallowing around below 1.24 euros (above 80 pence) and it may even make a low of 1.20 euros (83.3 pence) unless the global slowdown starts to impact more substantially on the Eurozone. To be fair, we have seen some signs of that with a slowdown in German manufacturing output and many members of the European Central Bank dropping heavy hints of an impending slowdown in the European economy; no doubt they would prefer a weaker Euro to stimulate exports.

In the meantime, those with Euros to sell may well think they have done something to please the gods and those with Sterling to sell must be wondering what they have done to deserve this. The haves may have more as time passes but, depressingly the have-nots are likely to have less.

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