Improving Property market in the Canary Islands aided by improvement in Sterling vs the Euro

MPC member sets the ball rolling with talk of higher UK interest rates. Greece's fiscal problems worry the euro.

After a day's hesitation in the vicinity of Monday's €1.11 starting point the pound set off higher. It was not quite a straight-line advance (it almost never is) but sterling did not really come to a stop until it topped out at €1.13 on Friday. End of week profit-taking brought a brief setback but the pound was back up beyond €1.63 by the time London opened this morning.

Sterling had a good week on almost every front. On the rare occasions it failed to make progress - and only the yen springs to mind - it was steady. There was not universal support in every case to start with but by Tuesday there was wind in every one of sterling's sails. The pound owed its uncharacteristic advance to the Bank of England, specifically to Andrew Sentance, a member of the Monetary Policy Committee. He told The Guardian newspaper that 'Threadneedle Street has done enough to lift Britain out of its deepest post-war slump and will need to consider raising interest rates this year if a recovering economy poses a threat to inflation.' In his opinion the sixth consecutive quarter of falling output in the third quarter of 2009 presented 'an excessively downbeat' picture of the UK economy and he downplayed the risk of a double-dip recession.

That argument received corroboration the following day. The National Institute for Economic and Social Research ('Britain's longest established independent economic research institute' according to its own blurb) reckons the economy grew by +0.3% in the fourth quarter, contracting by -4.8% in calendar 2009. That last figure was given added punch by simultaneous news that Germany's economy shrank by -5.0% on the year. Although the NIESR is not responsible for the 'official' figures investors were happy to accept that the UK economy had finally returned to growth and they clung to that upbeat mood for the rest of the week.

By contrast, investors did not have their usual disregard for factors detrimental to the euro. They have at last fallen in with the idea that Greece's membership of the euro cuts both ways. Total public sector borrowing in Greece is set to reach 120% of gross domestic product this year and could be as high as 140% of GDP in a couple of years' time. The Greek government says it intends to barrow this budget gap but its deeds have so far fallen short of its words. Some analysts have speculated that a possible solution is for Greece to abandon the euro and go back to issuing its own currency, a sort of Drachma II.

At his press conference on Thursday the president of the European Central Bank made his position clear. First he said the idea of Greece leaving the euro was 'absurd'. Then he went on to say the ECB would offer no special treatment to Greece. That means, following the downgrade of Greek credit ratings, that Greek government bonds will not be eligible as collateral at the ECB once it retightens its rules to pre-crisis standards. Yesterday's Sunday Telegraph carried a piece entitled 'ECB prepares legal ground for euro rupture as Greek crisis escalates'. The official ECB line seems to be that a) there is absolutely no chance of Greece leaving the euro and b) this is what will happen when it does. Investors are less than relaxed about the situation.

The pound has spent most of the last three months between $1.58 and $1.68. It starts this week right at the top of that range and looking punchy. If it can consolidate its gains there is nothing to prevent it reaching €1.15 without too much effort. The uncertainty principle still points to a 50% hedge of any euro requirement but there might be better levels at which to make the transaction. Buyers of the euro who are not already hedged should use a stop order for protection in anticipation of this rally carrying further.

Report provided by moneycorp