Posted by Allison on 1 September 2009, 15:27
Everyone knows that the currency markets are volatile. Fortunes can easily be made and lost by people betting on which currencies will rise and which ones won’t. But most people would probably agree that trying to bet on the British pound improving its standing against all the other major currencies at the moment would be a fool thing to do.
In recent weeks we have seen the British pound do very well against its rivals. It has in fact put in such a strong performance at times that it has been all too easy to assume that the worst is over. Some people thought the recession was pretty much over as well though – and it looks as though they were proved wrong. It’s probably just that we have got used to it. Perhaps it is these same people who were breathing a premature sigh of relief about the state of the pound at the moment.
It is never nice to be negative, but we’re not the only ones. One of the UK’s main newspapers, the Telegraph, has recently reported that things could soon get much worse again. You can read this outstanding and very informative article here.
Back when the pound was in freefall against the US dollar – you should remember that as it lasted for several months – everyone was wondering where the rock bottom point would be. There were nervous predictions that it could sink as low as $1.25, although it stopped short of this on the $1.40 mark and just below.
It is clearly a relief to see the pound back up to the $1.65 - $1.70 mark. But it is also no reason to suspect that the worst is over. It is tempting to think ‘oh well, there it goes. Sterling is heading back up again so we’ll forget about that horrible downward spiral it went into and get on with things again.’
In reality there is no reason why it shouldn’t go into freefall again. The volatility of the market, and the situation that the pound finds itself in, all means the currency is still far from out of the woods. It is anyone’s guess as to where the currency will go next – and it could prove us all wrong – but the signs aren’t that good.
After peaking at 1.1807 against the Euro on the 5th of August for example, it dropped back to 1.1731 the following day before ending the week on 1.1672. On Monday the pound rallied to 1.1715, but it couldn’t hold on to its brief bout of energy and it dipped down to 1.1649 on the very next day.
There are advantages to having a weak pound of course. It is more enticing for tourists to come over and make the most of that great exchange rate on their side of the coin. But it obviously doesn’t solve all the problems.
Any statements made by the Bank of England regarding the state of the economy at present can also have a pronounced effect on how the pound is doing on the world stage. There is a feeling of needing to tread very carefully to try and preserve the fragility of the pound. But at the same time it could all be for nothing.