Coalition worries
This is not to say the picture is straightforward for sterling: GBP runs large twin deficits on the current account and budget. The current account looks worse now than at any time in at least 60 years, possibly ever. It gets little attention, but could store up trouble. The other deficit is linked to the election, which is just over three months away and could potentially lead to a coalition of Labour and more left-wing parties – at which point sterling’s fundamental flaws may be expose, at least for a while.
Overall, the euro seems likely to maintain long-term weakness relative to sterling. Sterling has thus far only retraced around half of the mid-crisis drop – which has now dropped off the 5 year charts – but clearly the ‘easy’ money has been made on this.
Between today’s currencies, it often seems a contest of the least bad. Given potential interest-rate trajectories, the ECB is unlikely to raise rates in the foreseeable future. With UK Gilts yielding 1.7% compared to just 0.66% for French bonds, it is clear how sterling might attract international flows hunting for yield. This notwithstanding, currencies are notoriously difficult to call. We have a 50/50 chance of getting it right – at best!
