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Posted January 4th, 2010 by Charles Purdy

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 € sits at €1.127 inter bank having lost ground against sterling during the course of last week. This poor performance against sterling was as a result of data released that showed that loans to households and companies had fallen for a third straight year and clearly demonstrates the fragility still prevalent in the Eurozone recovery. Whilst Europe’s economy emerged from recession in the third quarter, this data shows that the banks are still reluctant to lend despite being pumped full of cash by the European Central Bank and suggests that a return to sustained growth and recovery may take longer than was first envisaged.

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