Sterling unexpectedly rallied and appears to be in line for additional gains after Bank of England Governor Mervyn King produced an abrupt turnaround on currency talk, sparking views that sterling has fallen far enough this year which has encouraged deals in favour of the British currency. The pound was also supported by a sharp sell-off in Scandinavian currencies which often rival sterling as a haven from eurozone concerns. Norway’s Central Bank triggered the slide after opening the door to a potential interest rate cut this year, highlighting the region’s exposure to Europe’s economic recession. The euro managed some gains but should stay under a cloud of uncertainty as political leaders in Italy gather in a bid to form some kind of coalition government. Any signs that Rome cannot break the deadlock and will go back to the polls could leave the euro and other high-interest currencies extremely vulnerable. The Swiss National Bank reminded investors not to pump safe haven demand in the direction of the franc, warning markets that it would intervene with unlimited amounts of cash if the Swiss currency’s value harmed the Swiss economy.
Sterling
The feeling that sterling has fallen far enough prompted traders to cover their excessively short positions and there is scope for further sterling gains after Governor Mervyn King changed course on currency guidance and said the Bank of England was not looking for a weaker currency. King’s sudden adjustment on currency rhetoric sent the pound rallying to one-week highs against the US dollar, telling markets that sterling was now “properly valued” and that “we’re probably there” in terms of a fairly valued exchange rate.
US dollar
Profit-taking on the US dollar’s record-breaking climb in recent weeks weakened the currency, while traders also remain alert to next week’s Federal Reserve policy meeting in which Chairman Ben Bernanke may dampen hawkish guesswork by standing firmly behind the Fed’s long-term monetary stimulus plans. Solid US unemployment data for the month of February led many currency watchers to believe the Fed may look to wind down its $85 billion-a-month monetary easing project as the economy gathers pace - a strong bullish indicator for the US dollar.
Euro
The euro rose against a weakened US dollar but remains under broad pressure as political leaders in Italy gather in a bid to form a coalition government, and put an end to speculation that political upheaval in Rome will resuscitate eurozone government debt risks this year. Early indications suggest there is every chance that Italy will turn to another election after February’s vote returned an inconclusive result, and stronger-than-expected support for anti-austerity parties.