At the start of last week, sterling performed poorly due to a rather gloomy outlook going into the New Year over concerns over the UK economy and rising public debt. However, UK economic data came in better than expected during the week as the Nationwide Building Society announced that the average house price has increased by 0.4% compared with November. This was more than analysts expected and as a result indicates that the UK may be starting to pull out of the longest recession on record, as this is the largest rise in house prices for 2 years.

Whilst this certainly doesn’t spell the end to the UK’s troubles, it is a welcome piece of positive news that has been noticeably absent over the last few months. This news prompted a sterling rally against the US$ and the Euro as many analysts said what we have all been thinking for a while – that sterling is far too undervalued against those currencies. The next major event on the horizon for sterling is the Bank of England meeting on the 7th January where all eyes will be glued on the policy report to see when the Bank is likely to scale back the programme of quantitative easing – any sign of this and we will see strengthening of the pound.

The US$ currently sits at US$1.616/£ 1 inter bank. Last week the US$ reached $1.623/£1 after sterling recovered from $1.583/£1 – the lowest price for 11 weeks. The low point for sterling was as a result of the feeling that the Fed will start to scale back the US bailout facility earlier than expected as unemployment unexpectedly fell in the USA. However, the movement against sterling was reversed by the positive UK house price data and many analysts stating that the US$ was overvalued against sterling.

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