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"The British pound's biggest rally in 14 months is in jeopardy as Prime Minister David Cameron's budget cuts begin to curb economic growth." So read a headline on Bloomberg last week.
Let's ignore the annoying assumptions behind this remark for a moment. (I would argue that Cameron's cuts will lay the foundations for economic growth, not curb it.) We'll focus on the main thrust of the story, which is that sterling is set to fall.
In a Bloomberg survey of strategists, the sterling bears outnumber the bulls by well over two to one.
Guess what? I think they've got it wrong…
Forecasters are extremely pessimistic on the pound
According to data compiled by Bloomberg, foreign-exchange forecasters are the most pessimistic on the pound since May 2009. Back then, credit rating agency Standard & Poor's had said that Britain was at risk of losing its AAA credit rating.
Sounds pretty grim, eh? But actually, when you look back, of the 21 trading days in May 2009, the pound rose against the dollar for 16 of them. It began the month at $1.48 and ended the month at $1.64. It then traded in a range between around $1.60 and $1.70 for six months or so, until fears over a hung parliament sent it heading back towards the $1.43 area.
So let's hope, for the sake of their yachts, that these foreign-exchange forecasters didn't put their money where their mouths were. Or, if they did, let's hope they had their stops in tight. If they're as pessimistic now as they were then, then the pound is due a pretty strong rally.
One of the bears, Ian Stannard at BNP Paribas, says: "Sterling is extremely vulnerable and is likely to start moving lower." His team believe it could fall as low as $1.32. But barring a stock market crash or a stand-off between the government and the public sector, I just don't see this happening.
Why sterling isn't as weak as many people think
Why not? Well, if you look at the last 20 years, sterling has only fallen below $1.43 four times. Once was during the sterling crisis of 1992-93. Then there was the slump following the dotcom crash in 2000-01.
The other two instances came during the credit crisis crash of 2008-09, and then again in May of this year, when it wasn't clear who was in charge of the country. In other words, we've only seen such lows at major extremes. And even then, there is extremely strong, long-term support just below $1.40. Indeed, we haven't been down below there since 1985, when the pound almost hit parity against the dollar, at a time when the UK had rampant unemployment and Margaret Thatcher was still fighting the miners' unions.
Now, such a confrontation is not beyond the realms of possibility for this government, as the public sector starts to get laid off in the coming months. And such lay-offs could be more painful if the inflationary impact of £200bn of quantitative easing finally reaches the man on the street. But, even in this extreme environment, I would still expect $1.38 to hold.
I should stress I am not wildly bullish about the pound, either. We still have too much debt in our system and many other problems to do with the excess spending of the last ten years to work through. But given the policies of the current government, I just don't see disaster lurking around the corner any more.
We have had an extremely sharp rally in the pound since May, as it became clear that the coalition government was by no means going to be a disaster. It rose from $1.43 to $1.60, where it hit a wall. The current correction (the pound is at $1.54 as I write) is perfectly normal. It is not, in my view, the beginning of a major leg down.
We could slip back to $1.50 or so quite easily. But much further, I would say is unlikely, barring, as I say, a stock market crash or a major confrontation with the unions. Sticking my neck out and making a prediction, I would expect sterling to trade in a range over the next year or two, with a cap at about $1.75 and a bottom around $1.47.
The pound has problems - but fewer than many other currencies
As I say, the pound has problems, but so do many of the alternatives. The dollar is undermined by the fiscally insane policy-makers currently in charge. The yen is wildly overbought. The euro survived the spring but the structural problems have not gone away. Another crisis lurks, as sure as eggs are eggs. I do like the commodity currencies, (the Canadian dollar, the Aussie dollar and the Norwegian krona), but they too have their problems, with the Aussie dollar looking particularly vulnerable.
Of course, as you probably already know, the only currency that I have any real faith in is gold. I've just put together a new report on the subject for MoneyWeek. As well as my thoughts on gold bullion and gold stocks, with details on how to buy both, there are some exciting microcap junior explorer tips. There's also a detailed report on how to trade silver, gold's badly behaved little sister. You can find out more here.
• The Gold Profit Plan is a regulated product issued by MoneyWeek Ltd. Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Please seek independent financial advice if necessary. MoneyWeek Ltd. 0207 633 3780.
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