Forex traders are focusing their attention on the pound

TOP of the agenda for many forex traders at the moment are two things &ndash; the future of the pound in the face of expansionary quantitative easing and a ballooning UK budget deficit. Indeed, these issues were among the most keenly discussed at the forex breakfast co-hosted by City A.M. and Alpari UK last Friday, where the general opinion of the speakers was that in the near-term at least, riskier currencies will do well from low volatility.<br /><br />One reason put forward by George Tchetvertakov, head of market research at Alpari UK, was that lower volatility will encourage risk appetite among traders. In the foreign currency markets, this is likely to boost the currencies which are seen as a riskier trade such as the Australian dollar, New Zealand dollar and, of course, the pound. He added that volatility had fallen to levels not seen for 10 months and it is precisely this that is behind the pound&rsquo;s current levels.<br /><br /><strong>PESSIMISTIC OUTLOOK</strong><br />However, the overwhelming opinion was that there are plenty of reasons to be pessimistic about the outlook for the UK economy and the pound over the next six months. &ldquo;Quantitative easing will be the most important factor for foreign exchange markets going forwards, and central banks&rsquo; exit strategies will be closely watched by traders,&rdquo; said Tchetvertakov.<br /><br />Allister Heath, editor of City A.M., agreed, saying: &ldquo;We are going to be hit by a double whammy. I think the Bank of England is going to be one of the first central banks to raise interest rates but we still have a consumer prices index (CPI) of 3 per cent which shows there is a lot of inflation stuck in the system.&rdquo; <br /><br /><strong>FURTHER EXPANSION</strong><br />At the current rate, quantitative easing will end in about six weeks, and there has been no announcement of plans for further expansion of the policy. As Tchetvertakov suggests, this will have a serious impact on the UK economy and on the money supply in particular.<br /><br />The scale of the UK&rsquo;s budget deficit is also worrying many investors. Indeed, data from the International Monetary Fund (IMF) released yesterday shows the weight of sterling in global FX reserves is the lowest since early 2006.<br /><br />Citigroup&rsquo;s Michael Saunders notes that in the first quarter, there was also a small net drop in FX reserves held in sterling (adjusted for currency swings). The gap left by the absence of major foreign demand for gilts is being filled by the BoE&rsquo;s massive gilt buying programme as part of QE.<br /><br />&ldquo;However, we doubt that gilt values are yet attractive enough to attract sufficient foreign demand to cover the UK&rsquo;s massive gilt issuance programme once QE ends, which will probably happen in the next month or two,&rdquo; he adds.<br /><br />While the pound clearly has further upside to come in the near future profiting from the risk rally and the struggles of the Eurozone, BNP Paribas currency strategist Ian Stannard says that the markets are now pricing in the best-case scenario rather than the worst-case and that we are going to get some disappointment.<br /><br />He says: &ldquo;Sterling could be the most vulnerable in the fourth quarter given the deterioration in the UK&rsquo;s fiscal position.&rdquo; Bad news for the pound. But for the informed forex trader, there&rsquo;s no such thing as bad news.<br /><br />City A.M. and Alpari UK will be hosting another breakfast tomorrow between 8.30am and 10.30am at the Bloomberg offices in Finsbury Square. You will be able to put questions to City A.M. editor Allister Heath, Alpari UK&rsquo;s chief operating officer David Stuart and its head of market research George Tchetvertakov. Please email as soon as possible to confirm your attendance at the seminar.