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‘Sterling Overvalued by 10-15%’: Vince Cable

‘Sterling Overvalued by 10-15%’: Vince Cable

The Business Secretary Vince Cable has warned that the UK recovery is being held back by our declining level of exports and attributed sterling’s recent gains to some of the stall. Speaking at the Liberal Democrat party’s annual conference in Glasgow, Mr. Cable went further to say “arguably, the pound is overvalued by 10 to 15 percent on a trade weighted basis”. This comes just a few months after both the IMF and BofE deputy Governor Broadbent both separately suggested the pound was up to 10 percent overvalued with Mr Broadbent further suggesting back in July that the strength of the pound may have a long lasting impact on inflation.

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The statement itself did little to affect markets on Monday as the day traded through a very range bound London session but the implications could be long reaching. Sterling’s recent gains have been felt heavily against the Euro with the pound up well over 10% against the single currency in the last year. This has been great news for those looking to emigrate to Euro-land and holiday makers alike. It has however hampered sales of British goods to what is our largest trade partner, in effect pricing our biggest and best customer out of the market. The question Mr Cable really posed was can the UK afford to raise interest rates next spring and risk further overvaluation of the pound?

GBP EUR Forecast

If you are looking to buy Euros, the question you will be asking is what will move this market further in my favour? The market as a whole expects a UK rate rise in the spring of 2015 and the recent GBP strength reflects this, but will it be able to push further given that this is firmly priced in and the pound seems overvalued? It looks uncertain to say the very least that breaching the 6 year high just below 1.29 and the key resistance level above that of 1.30 will be achievable unless there is another major event to shock the market (Scottish referendum). We have already seen the pound rebound back from the highs of last week and the current support could be short lived so whilst we are around a cent away from the 6 year high now certainly seems a decent time to buy your Euros. For those looking at selling the single currency, it is would be worth keeping an eye on the economic problems bubbling away in Italy and France, any further tremors could make the rate move further out of your favour…

Today’s Data releases

The UK’s monthly manufacturing production figures are the biggest release of note for GBP crosses this morning, an inflation adjusted barometer of what we are actually making in the UK. Elsewhere there is a monetary policy statement from Japan, monthly building permits from Canada, a string of speeches form FOMC member stateside and also the RBA rate statement from down under. Overall it is a fairly data heavy day so should see some more choppiness in the markets than yesterday so good luck with your trades today.

David Worthington

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