Increasingly unconventional monetary policy from the developed world's central banks has meant that large fluctuations in the world's major currencies has become a key feature of the past few years.
In the UK, the value of sterling fell sharply in 2008 after the onset of the global financial crisis and the Bank of England's quantitative easing programme has subsequently helped to keep sterling relatively weak by historic standards against the dollar and range bound against the euro, though sterling rebounded marginally at the height of the eurozone crisis last year.
There are some downside risks for sterling versus the euro in the near term, given the commitment by the new Bank of England governor, Mark Carney, to strengthen policy support for the economic recovery through a continuation of easy monetary policy. This will mainly be achieved, he hopes, by introducing so-called forward policy guidance, a policy already adopted by the Federal Reserve and designed to offer greater transparency about the future direction of interest rates. In contrast, with its much narrower mandate, the European Central Bank (ECB) has been presiding over a de facto tightening of policy via a shrinking balance sheet, a result of the region's banks repaying loans issued during the ECB's long term refinancing operation. Eventually, the latter is likely to reverse, but in the absence of any new eurozone crisis, the balance of relative policy factors is likely to keep the euro marginally stronger versus sterling.
Economic data has improved in recent months in both the UK and eurozone, although neither economic region has yet to achieve a clearly sustainable recovery path. The UK is somewhat better positioned in the short term, as growth is picking up while there is continued weakness in the periphery economies of Europe, where most regions in the south remain in recession. Nevertheless, relative positioning and sentiment is supportive of the euro versus sterling. Neither reading is so extreme as to warrant a contrarian stance. Overall a neutral position on the euro/sterling on a 6-12 month horizon appears the likely outcome. The Bank of England is likely to continue to favour policies that will anchor sterling against its main trading partner while economic growth remains weak. Both currencies are likely to drift lower versus the US dollar, given the better relative growth prospects and policy signals across the Atlantic.
We are grateful to Andersons, the farm business consultants, for their contribution to this bulletin. We have taken great care to ensure the accuracy of this newsletter. However, the newsletter is written in general terms and you are strongly recommended to seek specific advice before taking any action based on the information it contains. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. © Smith & Williamson Holdings Limited 2013 code: 1092/2013/db 13/841 Expiry date: 31/03/2014
