As the financial world now concentrates on seeking out hard assets, my initial feeling after the somewhat draconian spending cuts announced earlier this week, is that the GBP will soon start to strengthen. Fiscal conservatism will give investors in the UK and in the Gilt market much more confidence and this should support the GBP in the medium to long term- perhaps the term pound sterling can once again be appropriate.
The downside risks to the economy of implementing these major spending cuts remain unknown which is why the market is tending towards being short the GBP at the moment. EUR/GBP has risen to 6 month highs but with the world also now set on a course of diversification, I think this trend will eventually peter out and the pound will strengthen.
From a technical perspective, buying cable somewhere around the 100-day/200-day MAs (1.5330/1.5430) would also seem to be a sensible trade. When given the choice in times of major uncertainty between having one’s money in London or in Athens/Madrid, I think the double-decker buses may look very attractive.
