Can Sterling Build on Recent Gains?

29 June saw sterling hit a 19-month high against the euro as markets continue to speculate about the future of Europe’s single currency. But how likely is this rally to last?

The pound rose to an impressive 1.2389 against the euro on 29 June, its highest level since November 2008. But what is pushing the UK currency upwards?

Well, the state of the European banking for one. Despite the fact that eurozone banks are managing to repay emergency loans from the ECB, many are still hampered by bad debts. Analysts have also noted that eurozone banks are accepting ECB loans at up to 1% above the interbank lending rate, which indicates that they are struggling to find funding elsewhere. This has left investors anxious about the future of the region’s banking sector and sterling has benefited from the uncertainty.

Future prospects

Fears over European banks aren’t the only factor pushing sterling upwards. The UK government’s deficit reduction programme has also helped the currency appreciate. There has also been some speculation that interest rates will rise in the near future and this has further increased sterling’s investment potential.

As such, the third quarter of the fiscal year will be a crucial period for EUR/GBP. Sterling’s continued appreciation is largely dependent on the outcome of the government’s austerity measures and whether or not the Bank of England decides to raise interest rates. Similarly, the result of stress tests showing which eurozone banks are vulnerable to bad debts are due in September – and this information will have a marked effect on the euro’s strength.

Ready to trade forex?

Do you have a view on the future of EUR/GBP? We offer tight spreads and a standard margin from just 1%. We also have a range of resources to enhance your forex trading experience, including a daily Forex Focus, and superior charting and analysis tools.

Updated: 01/07/10