Why is the pound rising?

by Ed Bowsher on 02 June 2009  |  0 comments
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The rising pound is good news for holidaymakers, but why is our currency on the up?

The pound just keeps on going up!

Two weeks ago, the pound had already risen to $1.54, Today it's moved up to $1.64 - its highest level this year, well up from a low of $1.35 in January. The euro is also on the up.

This is obviously great news for holidaymakers. A pint of beer on the Costa Del Sol is now at least 10% cheaper for Brits than it was back in January.

So why is the pound rising?

I think it's partly because the financial markets are becoming more tolerant of risk. Investing in the UK has been seen as an especially risky bet because our economy is slanted towards the financial services sector. As the chances of a global depression apparently recede, putting some money in the UK doesn't seem so risky.

Then there's the UK's political situation. The expenses scandal means that a Conservative government looks ever more likely, and it may even take power in 2009 as opposed to 2010. The financial markets like the sound of a Tory government because David Cameron has been talking about getting the budget deficit under control.

If the deficit is controlled, the chance of a UK government defaulting on its debt falls . That means foreign investors are more likely to buy UK government bonds, which then pushes up the demand for the pound. That, in turn, makes the pound stronger when compared to other currencies.

So where is the pound going to go next?

I've no idea. Too hard to call at the moment.

Hat tip to breakingviews.com for highlighting how UK politics is impacting the currency markets right now.