BORIS SCHLOSSBERG<br /><strong>DIRECTOR OF CURRENCY RESEARCH, GFT</strong><br /><br />BY ANY reasonable measure the recent rally in the pound appears to be overdone. The UK economy is still in the midst of the worst recession in the post-war era. The UK fiscal budget deficit is projected to exceed 12 per cent of GDP – the highest among all industrialised nations. And the recent strength in the currency will only exacerbate the UK trade deficit, as exporters struggle with their costs. <br /><br />However, at present, the currency market has an insatiable appetite for risk. In the last week demand for risky assets has reached fever pitch, as market sentiment has been transformed from relief that the global economy has averted the second great depression to an outright belief that growth is back, and happy days are here once again.<br /><br />Despite the serious structural problems still present in the UK economy, traders have blithely ignored the fundamentals and bid the currency up to fresh 2009 highs against the dollar. But is this optimism justified? And is the world economy on the cusp of a strong and sustained recovery that will generate 3 per cent GDP growth? I continue to remain sceptical of this outcome. Although inventory levels have been replenished from near depression-like levels, consumer demand remains elusive in G3 economies.<br /><br />Cable is strong only because the Dow Jones is above 9,000. The massive rally in global equity markets has been a huge boost to the pound since the UK economy’s fortunes remain tied to those of the financial sector. <br /><br />For the time being, shorting the pound has been a sucker’s bet. This may be about to change – one of the key aspects of the pound is that it can fall as quickly as it rises, given that late speculative longs could bail out of the trade in a panic. The moment of reversal may not be yet at hand, but as the rally becomes more parabolic the chance of a correction increases significantly. Although the optimism of the bulls may be misplaced, I would wait for at least a reversal on the daily chart before attempting a short.<br /><br />Boris Schlossberg and Kathy Lien are directors of currency research at GFT. Read their daily commentary on currencies at www.GFTUK.com/commentary or e-mail them at BorisandKathy@gftuk.com.