By Nigel Hodges of Currency Solutions

While just about every economy is shrinking during the current recession, reports this morning show the black market for fraud is positively thriving. With an estimated 2000 people a week being caught for insurance fraud one man reported his car stolen only to later admit he had pushed it off a cliff himself, bringing an entirely new meaning to the economy falling off a cliff!

This week has brought a significant boost for sterling exchange rates, which rallied to a 3 month high against the US dollar and a 6 week high versus the euro. The pound has benefitted from its position as a third option for investors wary of deflation in the US and distrustful of the ECB. Sterling has also been pushing the high end of trading ranges against the Australian and New Zealand dollars and the South African Rand.

Despite the recession continuing to deepen, the pace of the decline has slowed in both the US and UK. While unemployment is still set to rise and credit restrictions remain tight, there is rekindled interest in the property market. In the UK the Royal Institute of Chartered Surveyors announced an upturn in market sentiment for the first time in 13 months and new home loan approvals have risen 4%.

However despite the recent gains, the labour market in the UK remains grim and the annual budget announced next week could be a source of weakness for sterling. Independent analysts are predicting a 3.7% economic contraction in 2009 and government debt is likely to be significantly higher than forecast in the pre-budget report last November. Combined with the Bank of England minutes, this could bring Sterling back down from recent highs with a thud.