Foreign Exchange Rate Forecasts: Pound rises on Mervyn King comments

Good afternoon. Well, we have finally seen a turnaround for Sterling’s fortunes, with exchange rates rising steadily both yesterday and today (Friday). Pound/Euro is back at 1.16 and Pound/Dollar has recovered comfortably above the $1.50 mark.

In my post today I will explain the reasons why the Pound has gone up against the Euro, and also have a look at next week’s data, as there are some important things happening that will affect exchange rates in the coming days and weeks.

The main reason for the rise in exchange rates is positive comments from the Bank of England governor Mervyn King. Yes you read that right – he actually made positive comments about Sterling! In some of his most upbeat comments since the financial crisis, he said that “there is momentum behind the recovery that’s coming” and that “good progress” has been made towards a new, sustainable economy in the last few years.

He also retreated from his earlier attempt to talk down the pound, which he has done several times this year already. Having said recently that the 8pc appreciation in sterling “was not a welcome development”; he cheered its recent decline to a two-and-a-half year low and suggested the pound had fallen far enough. “We’re certainly not looking to push sterling down,” he said. “We are moving to a properly valued exchange rate. I think we’re probably there.”

These comments caused the Pound to rally, pushing back up against most other currencies, which will be a welcome relief for anyone looking to buy currency with the Pound any time soon. The Governor also revealed that he has held discussions with the Chancellor and the Prime Minister about their economic strategy Last week, the Prime Minister hinted that the Bank would get new tools to boost growth in the Budget, saying he backed “monetary activism” and that “the Bank must support the recovery”.

Sir Mervyn’s comments came despite his recently voting to increase quantitative easing by £25bn to £400bn, and amid weak economic data for the last two months that have rekindled fears of a triple dip recession.

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The currency markets are notoriously volatile, and we often see wild swings in both directions. Putting Mervyn King’s comments to one side for a moment, let’s look at the actual state of the economy in the UK.

The National Institute of Economic and Social Research (NIESR) said British economic output had contracted between December and February; indicating the economy would struggle to avoid recession.

Strategists also said minutes from the central bank's Monetary Policy Committee on the likelihood of further quantitative easing (QE), the UK budget on March 20 and data releases were likely to see sterling suffer further losses.

Markets will remain wary of sterling ahead of the UK budget next week, and of course the latest BoE minutes, both of which we will see on Wednesday. Despite the positive comments, unless Mervyn has some king of crystal ball, I can’t see that much has changed to be honest. Growth is still slow, we may still head back in to recession, and most still thing further QE may happen in the next few months. This then may be a temporary upwards spike, however I expect markets will now await next week’s releases before the GBP/EUR cross makes significant changes in either direction.

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On Tuesday we will see UK inflation data and Retail Sales, which are a good barometer of overall economic activity, and so will be closely watched.

Wednesday is probably the most important day for Sterling in my opinion. We have the minutes to the recent BoE decision not to pursue any more Quantitative Easing. If this shows 3 or 4 members voted for it, then we may see the Pound weaken as it will increase the chance of QE in April or May.

Also on Wednesday The Chancellor George Osborne will deliver his 2013 Budget. Speculation is mounting that Chancellor George Osborne may announce a review of the Bank of England's remit and give it more leeway on inflation targeting, so this will be watched closely. I’ll do a full report on

Thursday regards what effect Wednesday’s data has on exchange rates Thursday will see some EU inflation data, but to be honest I expect markets will still be reacting to Wednesdays BoE minutes and budget.

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