Currency Watch: Sterling problems persist

It has not been a good week for the pound. With the recent data pointing to the UK economy remaining shackled by high inflation and growing at a feeble rate, I doubt sterling could fight its way out of a wet paper bag at the moment.

We received confirmation on Wednesday that UK GDP fell by 0.5% in the Q4 and it is rapidly becoming clear that the preliminary figure from Q1 will be the release that makes or breaks sterling’s year.
 
On this number it is very likely that we will see the Bank of England make its interest rate rise decision sooner rather than later if the preliminary figure from the Q1 is a good one. A May interest rate increase looks increasingly likely if that is the case. However, if the figure is a poor one August is the next stop.
 
The predominant view is that we will see a rate rise from the Europeans (although the logic of this escapes us) and that the Bank of England will hold at 0.5% as it has for the past two years. This and only this is the reason that EUR is so strong versus its crosses.

Should we see the ECB vacillate in its decision making process then we would expect to see some big euro weakness. If they do hike however then what happens to the PIGS could be quite horrific.

Jeremy Cook , chief economist at World First foreign exchange, 01.04.2011