Sterling has rallied to a six-month high against the US dollar, reflecting relief that the UK is not mired in a period of post-election political negotiations and some slightly less dovish noises from the Monetary Policy Committee. Capital Economics says – “Looking ahead, however, we think that sterling could slip back against the dollar. We continue to think that interest rates could rise at a faster pace in the US than markets currently expect in response to the strong prospects for wage growth there.”Sterling is showing some of the hallmarks of over-valuation – the UK’s current account deficit is equal to a whopping 6% or so of GDP and the sterling real effective exchange rate is now back to its pre-crisis level. There is a danger that an EU referendum could cause investors to become more reluctant to acquire UK assets at their present rapid pace, forcing the pound to depreciate.
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