All for a pound

Oversold, volatile and unpredictable, the British pound suffered an agonising 2008, only to kick off the new year with massive fluctuations against the euro and dollar.

After nearing parity with the euro and then promptly rebounding following the Bank of England's latest rate cut, speculation is rife on the sterling's prospects for 2009.

The currency slid 23 per cent against the euro in 2008 – its biggest annual drop since the common currency's debut – but the belligerent British currency has now begun its fight back.

The fall, attributed to UK policymakers' faster rate cuts as opposed to the European Central Bank (ECB), saw the sterling weaken to a record 98.03 pence per euro on December 30, making talk of parity the order of the day.

However, this week's resurgence was expected, analysts said, adding that the pound would take a further beating before restoring itself later in the year. Here, Emirates Business looks at the pound's prospects for the year ahead.

THE POUND IN 2009

Analysts say the pound will weaken, but not touch parity, in the next few months before returning to this week's levels to average the year at 90 pence to the euro.

The pound is headed for its biggest weekly advance against the euro since the common currency's debut in 1999 as the Bank of England slowed its pace of interest-rate cuts. The currency was at 89.90 pence per euro at 10.41am in London yesterday, bringing its appreciation this week to 6.4 per cent. The pound also strengthened 4.8 per cent against the dollar this week to $1.5246.

"The correction in euro-pound has been the main story of the week," Steven Pearson, a foreign exchange strategist at Merrill Lynch in London, said yesterday.

"While initially understandable in the context of an overshoot relative to metrics like short-term rate spreads, we would now caution against looking for too much in the way of further downward progress."

The pound will gain further traction against the euro and dollar as monetary and fiscal authorities seek to preserve international investor interest in sterling-denominated assets, said Stephen Gallo, head of market analysis in London at Schneider Foreign Exchange.

EURO-POUND PARITY

Investors should avoid betting on the pound reaching parity with the euro, according to UBS AG. "Any chase for parity in euro-pound is a clear overshot and offers limited risk-reward," Ashley Davies, a currency strategist in Singapore at UBS, wrote in a report. Meanwhile, BP Paribas predicted the pound would end the first quarter at 90 pence per euro and finish the year at 84 pence.

"The broad macro-economic backdrop remains sterling negative, meaning euro-sterling will probably remain elevated during 2009 after stabilising around 90 pence or so," said David Powell, a currency strategist at Bank of America in London.

Euro-sterling is supported at 89.90 pence per euro, as this would represent a 38.2 per cent retracement of the euro's rally against the pound from October 6 to December 30, according to analysis of Fibonacci numbers, Powell said. "There's a number of warning signals coming from Europe, suggesting the euro is going to come under sustained pressure over the coming weeks and months," said Ian Stannard, a foreign- exchange strategist at BNP Paribas in London.

"The market has not fully priced in the negative news we're likely to get from Europe, while in the UK, the market has fully taken on board the extent of the slowdown and its implications.

"The most important positive news for sterling has been talk of this government discussion concerning providing a guarantee for asset-backed securities," said Hans-Guenter Redeker, global head of foreign exchange strategy at BNP Paribas in London. "Oversold sterling is getting a bit of a bounce," said Jeremy Stretch, a senior currency strategist at Rabobank International in London. "The markets are waking up and realising the eurozone garden is not particularly rosy."

FOREIGN EXCHANGE 

A clear majority of Britons remain opposed to abandoning the pound in favour of the euro, a decade after the single European currency was introduced, according to a recent poll.

Some 71 per cent of respondents were against joining the euro, with only 23 per cent in favour, the ICM survey for BBC Radio found.

People were unswayed by the recent rockiness of the pound, with 69 per cent stating such fluctuations made no difference to whether Britain should join the single currency and 14 per cent said it actually made them less inclined. Only 15 per cent said the pound's fall made them keener on ditching sterling for the euro. The survey was published as the main opposition party, the Conservatives – who are leading the governing Labour party in opinion polls – said they would never take Britain into the euro.

The party's foreign affairs specialist, former Conservative leader William Hague, told Thursday's Daily Mail the idea of abandoning the pound after it had lost value was "a pretty stupid one – rather like thinking if you have let your house run down in value until it is the same as a smaller one next door, it is a good time to swap.

"We all know in that situation you have to learn to look after your house better."

"A Conservative government under [party leader] David Cameron would have no ministers telling Brussels we would be better off without the pound and no goal of joining the euro one day. We would never join the euro."

However, Business Secretary Lord Mandelson said the government maintained the long-term policy objective of taking Britain into the euro, although he insisted: "It's not for now."


Local impact

From seven dirhams to the pound at the start of 2008 to 5.3 dirhams at the end, a plummeting pound drew mixed reactions from local businesses and expats. A higher conversion rate meant high tourist inflow, as Britons found greater value in holidaying and shopping here. However, by the year-end, shopping in the UK seemed just as affordable and British outbound tourism to the UAE took a hit.

A weak pound meant that Briton's living here but reliant on UK wages, interest or benefits saw reduced disposable income. The devaluation meant cost of living on the pound soared and the weakening currency added to the woes of investors who were also struggling with huge drops in house prices and the stock market.

The sole positive to a devalued pound came to those earning in dirhams and paying off British mortgages and loans. Remittance to the UK from the region saw a flurry of activity, and transaction volume remains strong. Projections of a further fall indicate the next few months will continue to be ideal for those benefiting from a weak pound.

However, a resurging pound will bring back hope to a struggling retail, hospitality and tourism industry. A drop in room prices or discounts is not enough to guarantee high levels of British tourism, said a prominent retailer. "Higher foreign exchange rates influence Britons to travel, since affordability and therefore spending increases. Those visiting their friends and family at the moment are very apprehensive about spending, which wasn't the case earlier. As retailers, we are all hoping for a pound recovery."

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