Pound sterling faces a brighter future as the outlook for the UK economy improves, govt austerity drive also supportive say S&P

Details

Published on Monday, 30 July 2012 10:53

Written by Sam Coventry

"We currently expect real GDP growth to begin to recover in the second half of 2012 and to strengthen steadily thereafter." - S&P.

The pound sterling (Currency:GBP) is struggling today as global markets register gains ahead of expected central bank action this week. As a funding currency the pound, alongside the yen and US dollar, tend to struggle in such conditions.

The pound euro exchange rate is 0.12 pct in the blue at 1.2799 at 11:28 AM in London.

The pound dollar exchange rate is 0.31 pct lower at 1.5659.

The pound Australian dollar exchange rate is 0.43 pct lower at 1.4948.


Global macro conditions aside, the pound also finds itself hampered by a struggling economy.

Despite this, Standard and Poor’s has affirmed its highest triple-A rating for the country’s credit and has maintained the outlook as stable, relieving some of the pressure on the government and raising the prospect of further a strengthening pound as the year progresses.

The transmission mechanism for this is broadly thus: improving economy = tighter monetary policy at Bank of England = pound strength.

Referring to the UK’s economy as “wealthy and diverse”, S&P said that it expected economic performance to improve the second half of 2012 and to “steadily strengthen” thereafter.

"We currently expect real GDP growth to begin to recover in the second half of 2012 and to strengthen steadily thereafter. We base our projections on the government's current fiscal consolidation plans, an assessment of recently introduced measures designed to support and shield the economy, and the assumption that the eurozone will stabilise. We acknowledge the downside risks associated with these projections," say S&P.