Strong pound could threaten UK’s recovery

Tim Wallace
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THE POUND hit a 20-month high against the euro yesterday as nervous investors fled political uncertainty to put cash in the UK.

The euro fell 0.6 per cent in the day against the pound to 89.49p, its lowest since August 2010.

Expectations that quantitative easing is coming to an end has also helped push up the pound in recent days, which has now risen 7.5 per cent against a trade weighted basked of currencies since last June and to its highest level since August 2009.

Analysts believe the UK’s “safe haven” status is behind the appreciation.

“We believe the UK economy will show gradual improvement and the market will recognise the UK is in a much better situation than the Eurozone,” said Sara Yates from Barclays Capital. “In the Eurozone there are an awful lot of risks coming up, that helps reignite concerns about the political side.”

However, by making UK exports less competitive and making imports cheaper, that appreciation will act as a drag on growth.

M&G’s Jim Leaviss estimated the rise since June is equivalent to a 1.8 per cent monetary tightening.
“There could be big headwinds for the UK economy over the next few months,” he warned.