The fundamentals are dreadful; the economy is skirting with recession; the country is saddled with huge debts; fiscal austerity and falling real incomes are weighing heavily on confidence; and yet, the currency is actually holding its own.
Renewed doubts about Europe’s latest response to their sovereign debt and banking crisis provided the pound with considerable impetus yesterday and again overnight – EUR/GBP is now trading at 0.86, a one month low, down from 0.88 on Friday. Both investors and traders appear to regard the pound as a safer bet than the single currency these days. They also respect the fact that the government has been prepared to stick with fiscal austerity despite the obvious suffering it represents for consumers and businesses. This respect extends to the gilt market – the 10yr gilt yield is down a further 12bp this morning at 2.32%. Gilts have been an incredible investment this year – back in February, the 10yr yield was 3.7%! Should Europe continue to crater, then it would not be surprising if sterling benefited further, notwithstanding the immense domestic economic and financial challenges.