Since 1 July the British Pound has rallied almost 6% against the Euro and thanks to the escalating sovereign debt crisis in Europe, and Britain’s ability to hang on to its AAA rating, it looks set to strengthen even further.
Whilst Britain remains steadfast in its commitment to tackle its colossal public debt, ratings agency Standard & Poor’s has said it’s happy to maintain our AAA rating – something which is no doubt helping the relative strength of the pound.
The other major factor contributing to the strength of Stirling is the perception by the market that leaders in the Eurozone don’t have a credible plan for dealing with the threat of a Greek default and a likely contagion across the global banking system.
As the chart below shows, the pound is in an intermediate-term uptrend and it looks likely that this trend will continue. The upper limit of the trend channel points to a short-term target of 1.18.
1 year chart of the British Pound against the Euro
If we look at a longer term chart we can see that if the pound remains in its up channel it is likely to test resistance at around 1.20. The blue band shows where Stirling has previously run into resistance. Should it break 1.205, or thereabouts, the next target would be the 1.23 area.
Ultimately a nation’s currency is a function of its future earning power, and given Britain’s economic growth rate, which is for all intents and purposes is zero, I find it hard to be bullish on the pound longer term. It’s worth noting that many of the coalition government’s deficit reduction forecasts assume a 3% growth rate, meaning that we have little or no chance of meeting our deficit reduction targets.
Right now the pound is rallying not because it’s good but because it’s less bad and it is my view that our safe haven status won’t last. Nor will our AAA rating.