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Pound heads towards year high against dollar

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Pound heads towards year high against dollar

The British pound is slowly climbing towards its year high of $1.63 against the dollar, a key ‘resistance’ level that could test investor appetite for sterling.

Having risen by some 5% this year, and particularly strongly over the past month, the pound is slightly higher today at $1.627.

Short term the pound has been boosted by Tuesday’s inflation data, showing the consumer prices index stayed stubbornly at 2.7% in November, meaning the Bank of England may be less likely to re-start its bond buying programme. More clues will be sought in today’s publication of minutes from the last meeting of the Bank’s monetary policy committee.

Over recent months, the currency is being helped by the ‘risk-on’ appetite in markets in which the US dollar has suffered, while equities and relatively riskier currencies have been snapped up. At 5,965 Britain's FTSE 100 was today rising closer to March's year high mark of 5989.

Confounding expectations among soothsayers at the start of the year of dollar strength, the greenback looks like ending 2012 not far from where it started it. Aggressive action from the Federal Reserve has looked more convincing than the Bank of England’s efforts, with Britain’s quantitative easing (QE) scheme having been put on hold at £375 billion.

The UK economy grew by 1% in the third quarter of the year, but economists increasingly fear that a ‘triple dip’ back into contraction in the fourth quarter. Meanwhile, chancellor George Osborne was forced in his mini Budget earlier this month to announce downgrades to the UK’s growth outlook for 2012 and 2013, while admitting that he had missed one of its his fiscal targets.

But relative to other economies, the UK is still being perceived as a safe haven, one of few counties to hold onto a AAA credit rating.

Joshua Raymond, chief market strategist at City Index, said: ‘Whilst the Bank of England is going through QE, the US Fed is easing much more, the Bank of Japan is easing, and Europe is not in a great situation. And you’ve got the risk-on approach in markets. So if you are going to put your money in a currency, sterling is still in favour. ‘

If the UK loses its cherished but threatened AAA credit rating then the outlook on the pound could change. Raymond says that after a knee jerk reaction to an announcement from a credit ratings agency, ‘I don’t think it’d fundamentally change the outlook for sterling’.

Mike van Dulken, head of research at Accendo Markets, agrees that the threat to the UK's credit rating has been well-flagged and any downgrade would not rob the UK of its safe-haven status. Rather, he says, an extension of QE in the first quarter of 2013 could be the catalyst to stall sterling's rise.

The fear of a return to recession that could force the Bank of England to begin buying government bonds again led a majority of analysts polled by Reuters to say the pound will weaken slightly against the dollar in the coming year.

And Goldman Sachs reminded clients in a note this week that the Bank of England favours a weaker currency – to help Britain’s struggling exporters – and would use monetary policy to ease financial conditions.

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