Pound Makes U.K. No ‘Basket Case’ as Brown Trails

By Matthew Brown and Gavin Finch

April 16 (Bloomberg) -- The pound’s rally to $1.50 for the first time in three months shows financial markets are growing more confident in Gordon Brown even as he has yet to benefit in the polls during Britain’s worst recession since 1984.

The currency rebounded 2.2 percent versus the dollar this year to as high as $1.5068 today, and strengthened 8.5 percent against the euro. Nationwide polls show Brown’s Labour Party trailed the Conservatives, led by David Cameron, for the past year. Now, investors are betting the U.K.’s $2.7 trillion economy will be among the first to recover from the global slump.

“At the margins, it takes a lot of pressure off Gordon,” said Stewart Robertson, an economist at Aviva Investors in London, which manages about $230 billion in assets. “Getting headlines for plummeting currencies off the front pages is good, as there’s less talk of the U.K. being a basket case.”

The pound was last year’s worst-performing currency except for the South African rand, declining 26 percent against the dollar and 23 percent versus the euro. More than 2 million British citizens are unemployed. House prices have fallen 17 percent in 12 months. Gross domestic product contracted 1.6 percent in the last quarter of 2008, after 63 consecutive quarters of growth through March last year.

Voter confidence in Labour, led by Brown, 58, fell to 30 percent, compared with 43 percent for Cameron’s Conservatives, according to a Populus Ltd. survey on April 6. The poll, with a 2.5 point margin of error, showed the Conservatives extended their lead from 1 point in November. U.K. parliamentary rules require Brown to call a general election by June next year.

Home Prices

The pound rose to the highest level against the dollar since Jan. 12 after a report yesterday by the Royal Institution of Chartered Surveyors showed the slump in house prices eased in March. It was at $1.4899 and 88.19 pence per euro by 10:31 a.m. in London. The currency traded at 87.867 pence per euro yesterday, the strongest level since Feb. 24.

“There’s so much bad news priced into the pound that any good news gives the market a great reason to buy,” said Daragh Maher, the deputy head of global currency strategy in London at Calyon, the investment-banking arm of Credit Agricole SA. “We’re seeing some green shoots in the U.K. housing market,” which may drive the pound to 83 pence per euro in the coming months, he said.

Futures Bets

Speculation in the futures market that the pound will fall against the dollar increased in the last two weeks, with so- called net short positions rising to 34,462 on April 7 from 30,746 March 24, according to data from the Washington-based Commodity Futures Trading Commission.

The pound will fall to $1.45 and to 91 pence versus the euro by the end of the second quarter, according to the median estimates in Bloomberg surveys of at least 35 analysts.

Betting on pound gains is “definitely not a crowded trade,” said David Woo, global head of foreign-exchange strategy in London at Barclays Plc, who predicts the currency will strengthen to 80 pence per euro this year. “If you look at the data from the CFTC, the market still doesn’t have the position on sterling.”

Technical analysts, who use historic trading patters to predict future prices, suggest the pound will continue to advance. The currency has been trading above its 100-day moving average against the euro since April 7, the first time it broke through that level since Nov. 3, according to data compiled by Bloomberg.

Breaking Levels

“Euro-sterling has rammed through all of the technical levels,” said David Powell, a currency strategist in London at Merrill Lynch & Co. “Support was created by the 100-day moving average, but we’ve just gone right through there.”

Fibonacci charts show the pound may struggle to hold its gains unless it surpasses $1.5074. It almost reached that level three times since falling to a low of $1.3503 on Jan. 23.

Britain’s economy will shrink less than the U.S. and Europe this year, the Organization for Economic Cooperation and Development said on March 31. The U.K. will contract 3.7 percent, compared with 4.1 percent in the 16-nation euro-region and 4 percent in America, the Paris-based OECD said.

Brown’s government plans to sell at least 147.9 billion pounds ($195 billion) of debt in the fiscal year ending March 2010 to revive the economy, Europe’s second-largest. It sold an unprecedented 146.4 billion pounds of securities last year. The sales are helping finance a 25.6 billion-pound program of tax cuts and spending increases over the next two years. Brown has pledged 40 billion pounds to recapitalize banks and hundreds of billions of pounds in loan guarantees.

‘The Right Measures’

“On the financial sector, he’s put in place the right measures before any other country,” said Nick Kounis, an economist at Fortis Bank NV in Amsterdam and a former U.K. Treasury official. “Where he doesn’t rate highly is fiscal policy. The U.K. was in a very bad state when it entered the recession with a large deficit.”

Britain will have a deficit of 9.5 percent of gross domestic product in 2009, the most in the Group of Seven, according to the International Monetary Fund. The Washington- based lender forecast shortfalls of 7.7 percent in the U.S., 8.1 percent in Japan and 4 percent in Germany, according to estimates last month.

“History will reveal 2009/2010 as the time to buy cheap,” Neil Jones, the head of European hedge fund sales at Mizuho Corporate Bank in London said in a note yesterday. “We will look back on this era and say, ‘I should have loaded up on property, companies and stocks.’”

To contact the reporters on this story: Matthew Brown in London at mbrown42@bloomberg.net; Gavin Finch in London at gfinch@bloomberg.net