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Rally in sterling comes to an end

As news that UK inflation had increased to 2.9% in December hit the markets we saw a rally in the exchange rate with sterling picking up to hit a six-week high. However, Mervyn King placed a break upon the recovery in sterling last night with a suggestion that UK inflation will not push ahead and indeed is expected to fall back in the short to medium term. He also reiterated his concerns about the record budget deficit in the UK, two factors which have now led to a further sell-off in the UK currency.

There are serious underlying concerns about the strength of the UK economy which will be reflected in the strength of sterling and will ultimately impact on the export market. Exports will be a vital element of any economic recovery in the UK and the lower the rate of sterling against the likes of the dollar, the euro and other leading currencies, the more attractive UK services and UK products become to overseas buyers. However, a low sterling rate will impact upon the cost of imported goods which will ultimately impact upon inflation and the UK economic recovery. This is most certainly something of a double edged sword!

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