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Analysis
Sterling benefits from the Pfizer effect

Sterling benefits from the Pfizer effect

Interest rate anticipation driving up the pound – but watch for correction later 

by David Marsh

Wed 7 May 2014

Pfizer, a US pharmaceutical company renowned for making drugs with revitalising qualities, may have had a similar impact on sterling. But, as the British currency soars to $1.70, the question is whether this is all becoming somewhat exaggerated especially since the fizz appears to be going out of the Pfizer bid.

The maker of the impotence product Viagra has sparked a political row in Britain with its unsolicited bid for pharmaceuticals leader AstraZeneca. The offer, worth £65bn after last Friday’s ratcheting up of the bidding war, could potentially form the world’s largest pharma group, with ramifications for healthcare systems and providers all over the world. The battle over jobs and strategic interests is turning into an opening skirmish in the campaign for the UK general election in 12 months. There are strong signs, however, that opposition to the takeover is hardening – which could force up the price to an extent that the US company may simply walk away.

Financial markets’ anticipation that the deal will weather the political firestorm, and that this will spark additional demand for sterling as Pfizer converts dollars into pounds, has contributed to a further firming of the British currency towards a five-year high. However, sterling looks distinctly over-bought against the dollar and the euro. Longer term, the US currency can be expected to strengthen once US interest rates finally start to turn.

The main reason for sterling’s strength, indeed, reflects interest rate factors related to the unexpected dynamism of the British economy, showing the strongest growth trajectory of any G7 country. Markets believe that the Bank of England, ahead of the Federal Reserve and the European Central Bank, will be the first major central bank to raise interest rates, possibly before the end of the year. Official alarm over a UK housing bubble was signalled last week by Sir Jon Cunliffe, a deputy governor of the Bank of England, who said asset price spikes resembled 'a movie that has been seen more than once in the UK'.

The foreign exchange market’s assumptions about the effect on sterling look questionable. Even if the deal goes through, very few know how it would be financed and whether there would be a massive move out of the dollar. The Conservative-led government this week has shown unusual signs of progressive unease about the deal, with the strong implication that the US company is making undue use of the UK`s position as a low-tax location for corporate headquarters.

Ed Miliband, leader of the opposition Labour party, accused Prime Minister David Cameron of acting like a 'cheerleader' for the US company by going over the head of the AstraZeneca board in backing the bid. AstraZeneca seems similarly aggrieved and has called on the prime minister to maintain neutrality. The Conservative-led government says, for its part, it is piling pressure on Pfizer to safeguard jobs. 

The Conservatives allege that Labour’s strictures result partly from the party’s own remorse when it was in power in February 2010 in having allowed US food firm Kraft’s hostile takeover of food company Cadbury. Kraft promised to keep open the chocolate firm's Somerdale factory near Bristol. Soon after, Kraft shut the factory. Miliband says Pfizer has 'a pretty dubious record' in the UK, pointing to its partial closure of its research and development centre in Sandwich, Kent, two years ago. Whatever happens, this is turning out to be one of the most closely-fought takeover battles of the past decade.

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