Sterling hit its highest level of 2009 against the euro and a basket of currencies on Monday, capitalising on optimism about the UK economy which was underlined by a forecast that growth will return in 2010. The pound rose versus the euro despite losses against the dollar, which climbed broadly following comments from finance ministers from Russia and Japan at the weekend which supported the dollar's status as the world's top reserve currency.
The Confederation of British Industry on Monday predicted the economy would stabilise in the fourth quarter of the year, earlier than previous estimates, and that growth would return at the start of 2010. Analysts said that Monday's report added to the view that the UK economy is improving, which would continue to support sterling following its 10 percent rise since the start of May.
"On the back of improving economics, the UK will be one of the first to emerge from a recession," said Michael Hart, currency strategist at Citigroup in London, adding that this would happen in the third or fourth quarter of 2009.
"By extension, the Bank of England will be the first to hike rates," he added. Speculation that UK rates will eventually rise from a record low 0.5 percent as the economy recovers was also helping to push the pound higher, he said. Data last week showed UK industrial production is rising while falls in UK house prices are slowing, while a think tank said that the nation's economy grew in April and May.
By 1406 GMT, sterling traded 0.6 percent lower against a broadly stronger dollar at $1.6350. Sterling had pulled away from the day's low of $1.6305 in fairly volatile trade. Last week, the pair rallied to $1.6622, just shy of its strongest level of the year.
Analysts said sterling fell after the CBI report due to disappointment among some traders who had been anticipating forecasts for an earlier recovery. But it trimmed some losses, and rose against the euro on the view that a return to growth next year was hardly anything to complain about.
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