Sterling strengthens

10 Sep, 2008

Sterling strengthened against the dollar and euro on Tuesday, as dealers shrugged off yet more soft UK economic data and took advantage of the pound's slide to recent multi-year lows to buy it back at cheaper levels. A string of weak manufacturing output, housing and retail sales data on Tuesday highlighted ongoing worries about the struggling economy but that wasn't enough to push sterling down any further.
Having fallen to a two-and-a-half year low against the dollar on Monday and a record low against the euro last week, sterling was poised for a rebound, albeit a potentially brief one. "Many of the technical signals were that the pound was getting extremely oversold. It is not surprising against that backdrop to see cable recover," said Robert Minikin, currency strategist at Standard Chartered.
"There are risks of a short-term technical squeeze higher in sterling due to the fact that it has been so oversold," he said. Sterling rose as high as $1.7668, before pulling back to $1.7601 by 1437 GMT, up 0.1 percent on the day. The UK currency hit its lowest since April 2006 on Monday, at $1.7469. The euro hit a two-week low against the pound of 80.05 pence and at 1439 GMT it was down 0.3 percent on the day at 80.08 pence.
But the underlying picture in the UK remains "exceptionally weak", and any rebound in the pound will be limited, Minikin said. Data on Tuesday showed output in the UK manufacturing sector fell by more than expected in July, marking the fifth month in a row that production has fallen. There was also more gloom from the retail sector as the British Retail Consortium reported like-for-like high street sales fell 1.0 percent from a year earlier in August, the third fall in a row.
Meanwhile, the Royal Institution of Chartered Surveyors' latest survey continued to paint a bleak picture of the housing market despite unexpectedly reporting a slight improvement in its house price balance during August. Against a currency basket of Britain's major trading partners, the pound was at 88.7, still near a 12-year low of 87.9 hit earlier in the month.

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