Currency dealers more bullish for sterling?

Foreign exchange brokers are feeling increasingly bullish about prospects for sterling, as better news about the UK economy combines with growing doubts about the state of the eurozone.

The issue has gained relevance because more and more farmers are thinking of pre-booking the euro rate at which they will convert their single farm payments into sterling.

Sterling is worth 91p/euro, 15% weaker than it was at the end of September 2008. Pre-booking now would guarantee an increase in SFP of that order when this year’s payment arrives.

Of course, should the pound continue to weaken between now and 30 September, (when the SFP conversion rate is set), then farmers would be better off waiting. But should it strengthen, then locking in now would make good sense.

According to a foreign exchange broker, World First, there is more “bullish” sentiment in the market than “bearish”. In other words, sterling is thought more likely to strengthen.

In particular it points to problems in eastern Europe, where a number of governments are expected to default on their debts. This will have serious implications for bankers based in Germany, Austria and Italy.

Foreign exchange dealer HiFX also points to falling retail sales in Continental Europe and big drops in industrial output and new orders.

Today’s news that the European Central Bank has cut interest rates from 1.5% to a new low of 1.25% has not really helped. Most economists had expected a 0.5% cut to 1%.

New unemployment figures out this week also point to the highest level for three years in the eurozone at 13.5m, or 8.5%. This will inevitably hit consumer spending, further stifling economic growth.

Meanwhile, there has been better news in the UK this week, with house prices showing their first rise in 18 months. New mortgage approvals have also increased.

In a separate development, Chancellor Alistair Darling has trimmed back a planned rise in business rates, from 5% to 2%, so easing the burden on British businesses.

Sterling has responded positively to these recent developments, reaching €1.10 on Thursday, compared with €1.06 a fortnight ago and €1.03 at the start of the year.

This is not especially good news for British farming, as a strengthening pound is associated with falling farm income. But it could increase the incentive for farmers to pre-book their euros in respect of their 2009 SFPs.