The pound has recently enjoyed a rally for the past few months from its lows. Recently it gained 24% against the $US dollar, 20% against Swiss franc, and 16.7% againsts the Euro. Traders are wondering whether a sharp fall is nearby as this rally can’t last much longer with the pattern that is forming.

British shares are mainly invested in by oversea investors. When risk appetite rises they have to buy pounds in order to invest in more UK shares. When risk appetite wanes, sterling currency gets hit as oversea investors start to sell british assets and repatriate the proceeds in other countries.

Compared to the US market the UK stock market is cheap compared by historic trends. But the UK market is still a vulnerable market to be in as there still could be further falls to come. The recession is far from over and the credit crunch seems a long way of from a full recovery. Once the banks start lending again this is when we will start to see the green shoots and the start of a recovery, until then its a slow ride downwards. The banks are still short of capital so they are still very cautious about lending.

In previous anxious times the Swiss Franc and the Yen have been a safe investment for currency investors. But at the moment both are already very high levels against sterling. Also the government in both countries are keen to prevent their currency from gaining too much strength.

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