GBP improves but for how long

The week has started to take a little more shape, with sterling recovering well for a miserable start thanks mostly to the surprise UK GDP data on Tuesday.

Overnight however, Sterling fell against the euro and failed to make gains on a broadly weaker dollar as investors took the view that a rally in the pound was overdone and focus moved back to concerns over the UK's economic outlook.

The pound has been buoyed this week after stronger-than-expected third quarter UK GDP data eased market expectations that additional quantitative easing measures may be needed from the Bank of England.

Also providing support earlier in the week was rating agency S&P's revision of its UK outlook to "stable" from "negative", securing its triple-A credit rating.

But disappointing Nationwide housing data released in early European trade shifted focus back onto the downturn in the property market and the implications for future GDP readings.

British house prices fell for the third month in four in October, a survey showed on Thursday in a sign the downturn in the country's property market is becoming more entrenched.

Comments from Bank of England policymaker Adam Posen on Thursday in a newspaper interview emphasised weaknesses in the economy. Posen was the one member of the Bank's Monetary Policy Committee to vote for more quantitative easing at this month's policy meeting.
The pound did look a little weaker against the dollar prior to this morning’s house price data and the US currency appeared to shun the pattern of the last week or so and displayed some broader strength against a basket of currencies.

The dollar has retreated from the lower levels as investors trimmed bearish bets against the dollar on uncertainty over Federal Reserve stimulus.

But the pound has risen against the dollar since September on mounting speculation of more quantitative easing by the Federal Reserve.
The Wall Street Journal said on Wednesday that the Fed would unveil a programme next week of U.S. Treasury bond purchases worth a few hundred billion dollars over several months.

That would be more modest than investors' base-case scenario for an initial commitment to buy at least $500 billion in Treasury debt and gave the dollar a boost on Wednesday.

Traders said the dollar could bounce a bit further especially as hedge funds adjust their positions ahead of book closure in November and as investors reassess their holdings ahead of the Fed meeting next week and non-farm payrolls numbers, due on Nov. 5.

Market watchers are warning that sterling could come under renewed pressure if UK growth starts to falter due to recently announced austerity measures so buyers of currency may do well to lock in something at these current prices, because although we have avoided a double-dip recession we are a long way from a recovery.