Indeed it was, but investors are far from convinced that there will be a repeat of that performance any time soon. In fact they are convinced that the second quarter GDP figure will be a watershed. From here on in, Things Can Only Get Worse. It’s the Austerity Budget wot done it; that’s the view on the street. Spending cuts will hit every sector of the economy. Fewer consultants will be hired. Fewer policemen will fill in forms. Fewer speed cameras will collect revenue. Fewer pot plants will be bought or rented to grace departmental desks. The list goes on. It will mean less spending by the country as a whole and an erosion of GDP. Some say it will mean a return to recession, the dreaded double-dip.

That gloomy outlook has cast a shadow over what would otherwise have been a good run for the pound. After all, it is not as if the euro zone is without its problems. Those problems have not been in the headlines exactly, since the Greeks stopped blowing up banks and blocking the country’s borders a couple of months ago, but they have not gone away. Three months ago the EU trumpeted the creation of a Europe-wide financial safety net that would protect Greece (and others) from bankruptcy. German taxpayers did not like it one little bit at the time but Frau Merkel gave them their marching orders and they paid up to salvage the euro. Since then the rebellion has spread. Spain is considering relaxing its own austerity regimen in order to stimulate the economy. Slovakia has said to the EU that it ‘Can’t pay, won’t pay’ to support a country (Greece) that has chosen to blow its inheritance. The latest inequity is the downgrade of Ireland’s credit rating. Because of it, Ireland will have to pay some 5.25% interest on 10 year government debt. At the same time, through the EU, Ireland will be paying to hold down the Greek government’s cost of borrowing at 5%. Some say it is not fair that the prudent subsidise the spendthrift. Whether these cracks ever result in irreparable damage to the euro is up for grabs. Most analysts say they will not but the risk remains.

So we have the fiscally-responsible British government committing the country to a century-long depression and the fiscally-irresponsible southern European states condemning the euro to a sovereign debt implosion. The euro and the pound are both obviously doomed. Obviously not, but from investors’ point of view the risks are more or less evenly balanced at the moment. Sterling was the winner in August, adding a cent and a half , but it has been finding it tough going above €1.22. Given the uncertainty, there is no reason not to manage one’s exposure to sterling/euro with the traditional hedge, fixing a price today for half the currency needed in the future. The argument applies to buyers of the pound and buyers of the euro alike.

During the first month after the election the government spread the word that its ‘emergency’ budget would be a harsh one. Between them, politicians and the media painted a ghastly picture of frozen public sector salaries, tax increases, job cuts and pension rearrangements. And that was just the good bit. The population was optimistic that the cuts would hit other folk harder than themselves. Investors hoped the new government would have the guts to address the problems and solve Britain’s systemic borrow-and-spend culture. The budget was billed as a corker and so it turned out to be.

Chancellor George Osborne’s plan was to reduce the annual budget to almost zero within the life of the parliament, five years. He would do it with a mix of spending cuts and tax rises that would, he hoped, spread the pain ‘fairly’. In a previous era his brave promises would have been undermined by dodgy statistics: British chancellors in the past have been notorious for swerving their projections of economic growth to suit their argument. This time, the job of making those forecasts has been outsourced to a non-political triumvirate of respected economists; the Office for Budget Responsibility. When Mr Osborne built into his plan the prospect of 1%-3% economic growth over the next five years financial markets were prepared for the first time to believe it because the projections were not politically-inspired.

Understandably, Britain’s workers and pensioners were worried by how much these austerity measures would cost them, personally, in the years to come. It is of little consolation to know that others are being equally hurt. Yet there seems to be an acceptance that something had to be done and that five years’ pain is preferable to endless years of lingering misery. There was no such dichotomy of sentiment for the world’s investors. They saw the sharp sword of fiscal probity slice, with a single stroke, through the Gordian Knot of Gordonian profligacy and they were impressed. The chancellor had said early in his speech that an important aim was to preserve Britain’s priceless AAA credit rating; by the end of it he had done just that.

It would be an exaggeration to say that sterling went from pariah to paragon in the space of an hour-long budget speech but it would not be much of an exaggeration.

On the other side of the equation the euro has, over the space of little more than six months, slipped from being the world’s second or third most trusted reserve currency to a position of distrust. The trillion-dollar safety net for failing euro zone nations, which was put in place in early May has done its job so far: Greece has not gone bust. But it has failed to generate the confidence that its authors hoped for. Were Greece to have to borrow money on the open market today it would still have to pay eight percentage points more in interest than Germany pays. That’s an awful lot. There is also nervousness about EU plans to ‘stress test’ Euroland commercial banks. The idea is to model possible future financial crises and to see how the banks would fare if, say, Greece were to default on its borrowings. The results are likely to be horrible for some institutions because they have so much of their money invested in government bonds and in failing real estate developments in southern Europe. The euro is looking shaky for all the right reasons.

The situation facing the sterling/euro exchange rate is almost a mirror image of the picture at the end of last year. Investors have regained, to a large extent, their confidence in the pound and have lost much of their faith in the euro. It is far easier today to be upbeat about sterling and downbeat about the euro than it has been for a long time. Although there can be no guarantee that sterling/euro will be higher in six months’ or a year’s time than it is today, there are many reasons why it is likely to be. Any sterling-based investor needing to buy euros in the foreseeable future should consider hedging much less of their exposure than the 50% that prudence normally requires.

The main releases from the UK saw the publication of the Purchasing Managers Index (PMI) figures, which are leading indicators of economic health and seen as a good barometer of the sustainability of the current recovery in markets around the world. The UK’s Manufacturing PMI maintained a 15-year high reading of 58 (above 50 is expansionary, below is a sign of contraction in activity) despite a small fall being forecast. The construction sector also continued its recent resurgence with a reading of 58.5 (which was marginally above expectations), while the services number – the most important of the three – was slightly down on expectations, but still strong at 55.4. All of this lends further credibility to the UK recovery gathering pace.

Elsewhere, the pound also gained on news that UK house prices rose to the highest levels in more than two years. The Nationwide Building Society said the average cost of a home increased 0.5% in May to the highest level since July 2008. They maintain their view that the current supply and demand balance in the market is still consistent, with relatively stable to modestly increasing prices.

The other main news of the week was the collapse of the ambitious attempt by Prudential to buy AIG’s Asian arm. This prompted the unwinding of currency hedges put in place in anticipation of a deal, when the initial bid was announced back in March. AIG’s outright rejection of a reduced offer from The Pru’ put an end to the deal once and for all, with the UK insurer confirming that the deal was off on Wednesday. Sterling rose broadly on Tuesday as anticipation grew that the deal was close to collapse. The currency was still benefitting when the deal was finally taken off the table.

The euro has continued to struggle, as risk aversion at one point waned, resulting in renewed buying of riskier assets, including sterling. The recent downgrade of Spanish sovereign debt by credit ratings agency Fitch left the euro on the back foot due to ongoing structural weaknesses, particularly in the southern Mediterranean area of the eurozone.

Despite assurances from China and Kuwait that the euro’s current troubles would not affect their purchases of the single currency, rumours surfaced that Iran planned to sell some of its euro holdings as a result of the volatility. A Chinese news agency report that the Iranian central bank would sell €45bn of its foreign exchange reserves to buy dollars and gold further dented investors’ desire to hold the single currency. This adjustment to their reserve holdings was expected to be conducted in three stages, with the first tranche already underway. It was also claimed that other Gulf states had started to cut their euro holdings.

Data flows have had limited impact on the single currency in recent weeks and the same was true this time around. German retail sales and employment figures were better than forecast, whereas the Europe-wide unemployment rate remained constant. European retail sales were down 1.2% against the forecast of a small rise and revised GDP was unchanged at 0.2%. As mentioned above, this had almost no effect on the euro, with investors preoccupied with more serious matters. However, the data is not supportive of a broad-based recovery in Europe, which will be of concern to those nations about to embark on significant spending cuts that will only hinder growth further. A more specific indicator of future growth rates was the composite European version of the Purchasing Managers Index (PMI). This showed a fall to 56.4 from 57.3 in April – although this was still above an estimated 56.2. The service sector component rose to 56.2 from 55.6, whereas the manufacturing figure declined to 55.8 from 57.6. The outlook for the region’s economy has darkened in recent months, as the threat of contagion from Greece’s fiscal crisis raises investors’ concern about the future of the euro area. While the problem has pushed the euro lower this year, making exports more competitive, governments have had to respond with tougher austerity measures to cut budget deficits. This, in turn, has dampened consumer confidence.

Further alarming news from the eurozone came from an eastern European member state. Last week saw Hungary’s new Prime Minister, Viktor Orban reveal that his nation’s finances were in a “very grave situation” and that his predecessor had falsified the true state of his country’s finances.

Whilst Hungary is not the biggest economic power in the world, this news will further undermine confidence in the eurozone due to the lengthening list of nations that may need to seek emergency funding from the European Central Bank (ECB) in the future.

With worsening economic conditions gripping the southern Mediterranean countries, we are already seeing great levels for euro buyers to hedge all or part of their exposure. Whether for a one-off real estate purchase or ongoing living costs, they would be wise to fix a price for half the amount of currency they are going to need. Hedging does not guarantee buying euros at the best possible price; it guarantees not buying them at the worst.

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It was a rather more exciting week for sterling than investors might have wished.   From €1.1550 it climbed as far as €1.1850 before plummeting five cents on Thursday and Friday.  A three-cent bounce and a two-cent fall added to the nervousness.

Investors did not pay the slightest attention to last week’s UK economic data.  Improvements or increases in mortgage approvals, purchasing managers’ indices, house prices and factory gate prices passed by unremarked and almost unnoticed.  The market was far less concerned about what Britain’s economy had done in the past than it was about who would be in charge of it in the future.

On the face of it, investors ought to have been prepared for none of the parties to achieve an overall majority.  After all, the opinion polls had been pointing to a hung parliament since the beginning of the year.  But they were not geared up for one quite so spectacularly well hung.  The Liberal Democrats’ Vince Cable described the result as ‘a perfect snooker’ and the outgoing prime minister decided to stay on at Number Ten for a few days; after all, nobody else was knocking to demand admittance.  Not surprisingly the outcome – or the lack of one – made life uncomfortable for sterling.  The market had been hoping for an incoming government ready to buckle down to the task of sorting out Britain’s debt: what it got instead was the prospect of a coalition arguing about how to go about the job.

But it was not the election that led to the massive volatility on Thursday and Friday, it was Wall Street.  In less than an hour on Thursday New York share prices collapsed by almost ten per cent.  In terms of points it was the biggest ever one-day move and the subsequent rebound was almost as scary. The fall rubbed off on equity markets around the world and investors abandoned ‘risky’ currencies, flocking to the safety of the US dollar and the Japanese yen.  The US authorities are still investigating the cause of the furore but the word on the street is that computer-driven trading models were to blame.  As the market fell they became ever more frenzied in their efforts to sell, even pushing the price of some shares temporarily to zero.

If investors were uninterested in the UK economic data they were scarcely more bothered about the Euroland numbers.  Some were unimpressive. France’s manufacturing sector purchasing managers’ index  went down as everyone else’s went up. German retail sales fell by -2.4% in March and sales for the euro zone as a whole were slightly lower.  Some were good.  German factory orders rose by +5.0% in March alone and industrial production was up by +4.0%.

But the focus was squarely on Greek firebombs and the inconclusive bailout package.  When EU citizens start murdering each other for political motives the market gets nervous.  By the end of the week that nervousness had abated somewhat.  Although the Greek mobs were still out there it seemed more likely that Europe’s leaders had at last bitten the bullet and decided to do something to patch up their collective finances.  Late on Sunday night they announced agreement – with the help of a small contribution from Britain – on a €750 billion safety net that would support not just Greece but any other EU country that found itself in a similar plight.

As always in these bailouts (this is perhaps the fifth in so many months, it is easy to lose count) the devil is in the detail.  Markets are inclined to be initially enthusiastic, becoming dubious as the list of conditions grows longer.  This latest effort looks more plausible than its predecessors because it has the backing of Germany (Mrs Merkel took a pasting in regional elections yesterday because of her support for it) and recognises that the problems of Greece today could affect the rest of Club Med tomorrow.

Nevertheless, and cynicism aside, last night’s agreement in Brussels looks much more like the Real Deal than any of its predecessors.  Sterling has had something of a free ride in the last couple of months that might now be coming to an end.  It is feasible that the European Central Bank could be buying Greek government bonds before the boys in Westminster hammer out a deal to shape the next parliament.

As for sterling itself, investors are hardly any wiser this morning than they were a week ago.  It seems likely that Mr Cameron will end up as prime minister but nobody can be sure.  If he does, and if a Lib/Con coalition can announce plausible measures to sort out the deficit, sterling could start to fight back.  If Mr Brown tries to soldier on without any prospect of a majority (for he has none) the pound will come under renewed pressure.  That uncertainly leaves little alternative other than to stick with a boring but prudent hedge:  Buyers of the euro should cover 50% of their requirement and review the situation once the shape of the new government becomes clear.

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The performance of sterling against the euro continues to depend on a trade-off between bad news from Britain and bad news from Euroland. (There is almost no good news from either.) For the euro zone, the bad news relates to deficit funding and politics. In Britain’s case it is deficit funding and, er, politics.

To cover the simplest one first, the UK government is in the process of borrowing in just a few years more money than every previous government has borrowed, added together. By way of illustration, the net £4.2 billion in January market the first ever occasion when January had not been in surplus as a result of tax receipts. The chap in charge of managing Britain’s national debt has said he is not worried. He expects to be able to sell every gilt he needs to issue. Investors are not so sure, especially if the nightmare of a downgrade to Britain’s credit rating comes true.

Sterling’s political handicap is the upcoming general election. For one thing, Gordon Brown’s administration has made it abundantly clear that it will take no draconian steps which might alienate voters ahead of the vote. For similar reasons, neither he nor the Conservatives want to spell out in too much detail how painful any future measures might be. It must be assumed that, whichever party wins, it will do what it sees fit to reduce the size of the debt mountain but what if nobody wins? Investors fear that a hung parliament, where no party has an absolute majority, will be frozen by indecision.

The euro’s problems revolve around Greece and its own huge pile of debt. Greece’s credit rating is already only a hair’s breadth above ‘junk’ and the big ratings agencies are threatening that to push it over that cliff is the Papandreou government does not get its act together. Were that to happen, Greece would find it yet more difficult to sell the bonds it needs to fund its activities. In a perfect world Greece’s rich Euroland partners would help it out with a loan or a credit guarantee but Germany’s outright refusal to do so and France’s Gallic shrug make it look as though Athens will have to work its own salvation. But what if it can’t or won’t? The chap in charge of managing Germany’s national debt offered a harsh assessment of the situation. He told a conference in London that ‘if a country goes bankrupt, it will be the end’ of the euro. It was not the rosiest possible picture that he painted.

At the moment sterling is the market’s whipping boy, especially after various members of the Monetary Policy Committee stood up to say that there might be a need for more quantitative easing (what the tabloids describe only slightly unfairly as ‘printing money’). Investors seize on every piece of bad news while ignoring the occasional nugget of good. A case in point was the market’s reaction to an upward revision of Britain’s economic performance in the last quarter of 2009. Instead of expanding by just +0.1%, the latest guess is that gross domestic product grew by +0.3%. Rather than rejoicing at the good news, investors sold the pound because alongside the improved figure for gross domestic product was another showing that government spending over the same period had been much higher than anyone thought

Sterling could well be in for more rough treatment unless things go seriously pear-shaped in Greece and the euro zone. It might have further to fall before it has its next shot at a place in the sun.

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Before long it became apparent that the domestic UK political situation was exerting more of an influence. In particular, investors and credit ratings agencies seemed to be pinning their hopes on a change of government at general election time. This was not through any philosophical or party political inclination. Rather, it was because they had minimal confidence in the ability of Mr Brown and his gang to get to grips with the widening budget gap. As long as there was a realistic prospect of regime change, sterling had the benefit of the doubt. This attitude became clearer with the attempted back-bench putsch in early January. Sterling initially fell, when it seemed possible that the prime minister might be replaced by somebody more electable. The failure of the coup reassured the market that he would lead his party to defeat in May (probably). This was seen as a good thing for the currency and the bear raid was called off.

But it was not UK politics that accounted for sterling’s success against the euro later in the month. That was down to Greek politics and euro zone politics. Investors at last fell in with the idea that the budget gap in Greece was significantly bigger than Britain’s and that the political will in Athens to deal with it was considerably weaker than in London. Whilst the contribution of Greece to the Euroland economy as a whole is modest, it is still a member of the single currency. As with the princess and the pea, a problem down in Greece can be felt up in Germany and France. There were even scurrilous rumours that Greece could secede from the euro and reinvent the Drachma. That is very unlikely to happen, at least as far as the current problems are concerned, but the whole scenario made investors rethink their blithe assumption that nothing could go wrong for the euro under any circumstances.

The end of the month brought a reality check for sterling when Britain registered another monthly record for public sector borrowing and a fall in M4 money supply. The first was a reminder that the domestic budget gap is still widening. The second was a warning that the Bank of England might yet have to extend its programme of quantitative easing – ‘printing money’.

Sterling is not on the rails in the way it was in autumn last year. There has been no recent talk of parity with the euro and beyond. Its performance in mid January reassured those who had written the old girl off. It was not unreasonable to think it might regain the highs of last summer, maybe even with a stab at €1.20, until the disappointing figures for Britain’s economy growth in the fourth quarter showed ‘growth’ of next to nothing. If you need to convert pounds into euros, buying them now a cent or more above the last year’s average price would not look like a total cop-out.

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But that would be an erroneous description. Whatever else sterling might be it is certainly not carefree and there have been some scary moments for it in December. The chancellor’s pre-budget report was one of them. With the recession eating into tax revenues and public spending consuming cash at an unabated pace everywhere from Afghanistan to the City of London the chancellor set out no plan to balance the budget. With the exception of a windfall tax on greedy bankers’ bonuses it was almost business as usual. Mr Darling and his boss do after all have a general election to fight in the next six months. Neither higher taxes (except on bankers) or reduced spending would have helped them in that endeavour. Fortunately, investors had had such low expectations of the mini-budget that they were not unduly disappointed.

But there is another consequence of Downing Street’s electioneering approach to fiscal policy. Britain’s credit ratings are at risk because the books do not balance. The United Kingdom has enjoyed a AAA credit rating, the very best, because the country is run in a responsible way. That has allowed it to borrow money at the finest margins. But now Britain needs to borrow twice as much money as it has in the past, ever. The ratings agencies worry that the country is over-extending itself. The more they worry, the more likely they are to downgrade that triple-A rating. It would mean the government having to pay even more in interest than the amounts it is already lined up for. And it would hurt the pound.

Investors have been patient with sterling despite its shortcomings. They are giving it the benefit of the doubt on the assumption that an early general election, possibly as soon as March, will allow a new government to get to grips with the budget gap. But what if the election were not until June, and what if the budget in March were to resemble the chancellor’s pre-budget report?

Just after Christmas the Daily Telegraph reported on a paper by the Centre for Economics and Business Research. It described the economy as walking five yards away from the edge of a cliff’ and could be toppled by an ‘unexpected gust’. Crucially, the CBBR reckons there is a real risk that the pound could fall below Parity with the euro if investors began to doubt a Tory election win.

So will it fall? Nobody can say with any precision. Uncertainty is, after all, the only thing one can be sure of in financial markets. The only way to know how many euros your pounds will buy in six or 12 months’ time is to fix a rate now, through a ‘forward’ contract with your currency specialist. In return for a ten per cent deposit, certainty is assured. If a sub-€1 pound would hurt, arrange some protection.

Yet again the euro managed to avoid the headlines and thereby the attention accorded to its higher-profile peers. The dollar was under steady downward pressure because of ongoing unease among investors about the state of government finances. There was upward pressure on the yen as a by-product of dollar weakness and because the market felt there was potential mileage in pushing for long term highs against the dollar. The pound alternated between looking good, for example when house price indices showed a continuing recovery, and bad when anyone form the Bank of England opened their mouth.

To be fair to the Bank, its pronouncements in November were nowhere near as damaging as they had been in the preceding couple of months. The minutes of the Monetary Policy Committee were less than helpful, showing a greater than usual lack of unanimity at the November meeting. One member thought there was no need for any extension of the quantitative easing (“printing money”) that has been going on since the beginning of the year. Seven members thought another £25 billion would do the trick and one wanted to bung in an extra £40 billion. It was all fair debate on a subject that even the best-informed experts find perplexing but it made investors nervous about the pound.

The Governor continued his efforts to manage economic expectations – and the pound – downwards but one of his boys decided to put a brighter shine on the situation. MPC member Andrew Sentance conceded in a speech that ‘the UK economy is now moving out of recession and into the recovery phase of the cycle.’ He also looked ahead to when interest rates would have to move upwards again because ‘as the recovery develops there will also come a point where we need to tighten monetary policy.’ Having become accustomed to a diet of doom and gloom from the Bank, investors saw Dr Sentance’s position as a ray of hope for the UK economy.

Towards the end of the month the pound found itself under fire again when the Emirates state-owned firm Dubai World announced that it would not be making any loan repayments for six months. There were a couple of reasons for sterling to take the flak. Britain’s banks are heavily involved in the region and are therefore probably (though nobody was admitting anything at the time) exposed to Dubai World. At a different level, it was a reminder that Britain’s sovereign debt is at risk of losing its top-level AAA credit rating. Like Dubai, but on an entirely different scale, the UK government has borrowed, and will have to borrow in the future, very large amounts of money. There is absolutely no danger that Britain could default on its borrowings; in the very worst case it could repay with newly-minted money. But investors are not brimming with confidence about the possibilities.

A recovery for sterling remains as elusive as ever. The pound seems ever-ready to snatch defeat from the jaws of victory and the government is doing nothing to answer investors’ fears about the budget gap or the economy. The accident-prone pound still looks more at home running with turkeys than soaring with eagles.