Sterling ticked up versus the euro and dollar on Wednesday, bolstered by an increase in risk appetite, but analysts said the longer term outlook for the British economy and its currency remained relatively glum. Risk appetite improved broadly on speculation that the worst of the credit crisis may have passed after the latest batch of bank write-downs.
This was positive for the pound, which has been hard hit by trouble in the financial sector in recent months due to the important role such companies play in Britain's economy. "The financial services stocks are rallying, I am surprised sterling is not even stronger still," said John Hardy, FX strategist at Saxo Bank, Copenhagen.
"The longer term story for sterling is that there are some serious problems, and the structural risk story will weigh on it for a long time ... with the fall in house prices, the terms of trade problems, etc."
By 1420 GMT, sterling was up a third of a percent at $1.9821. The euro fell a similar percentage to 78.80 pence, more than a penny below record peaks set on Monday. The pound also gained versus the yen and the Swiss franc.
Beyond the very near-term though, most analysts expect sterling to face renewed downward pressure - the monthly Reuters foreign exchange poll, released on Wednesday, showed sterling easing to $1.90 on the 12-month horizon. Such a prognosis got some support from data, with mortgage approvals languishing near decade lows in February.
"UK housing market data is broadly in line with expectations, but continues to point to a sharp downturn in the sector," ING said in a research note. Short sterling futures are pricing in another 50 basis points of easing from the current 5.25 percent.
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