x Abu Dhabi, UAETuesday 25 July 2017

British pound on back foot against the euro

The British pound could return to earth as uncertainties about the US and EU economies quiets down.

With Queen Elizabeth II due to touch down in Abu Dhabi on Wednesday, the British pound that bears her image could return to earth with a bump as uncertainty surrounding the US and the EU economies subsides.

As Ireland nears requesting a bailout from the EU and IMF, said to be worth "tens of billions of euros" according to Brian Lenihan, the finance minister, currency concern has turned to the UK.

Britain had, until recently, been seen as a safe haven by investors despite its deficit worries, with sterling peaking at €1.23 in June.

However, with an Irish bailout looking more certain, the euro strengthened 0.6 per cent to €1.16 to the pound on Friday. However, sterling came out better against the dollar, rising 0.55 per cent to $1.59.

Jane Foley, a senior currency strategist at Rabobank, told Bloomberg the pound was "on the back foot" relative to the euro.

According to analysts from Goldman Sachs, the pound will experience significant uncertainty against a number of currencies.

"Sterling is being pulled in opposite directions," a report from the investment bank said. "The combination of fiscal consolidation ahead and an easy monetary policy stance is not supportive for FX [foreign exchange] strength typically."

However, the report said sterling would strengthen to reach $1.85 within the next 12 months, largely due to dollar weakness, while it would remain "flat" against the euro for the year ahead.

Meanwhile, Sridhar Kothandaraman, a foreign exchange and equity trader at ABN Amro, said the pound would, at best, only maintain its recent strength compared with the dollar.

"I think it'll be in the range of $1.58 to $1.61, [within the next three months]" he said, adding that a resolution of the Irish debt crisis would keep the pound from sinking any further.

"Now that they say there will be a bailout, the European crisis will have little impact … there are so many banks exposed to European banks' debt. I'm sure the EU will not allow them to go into bankruptcy."

However, he added that the fundamentals for the UK economy were poor - which could weigh down sterling in the coming months.