Foreign Exchange Rate Forecasts: Sterling falls on Lloyds News

Sterling has fallen this morning, taking the GBPEUR rate to the lowest in a month. Also GBPUSD has dropped below $1.40 this morning, following the news over the weekend that the government has increased its stake in the Lloyds Banking Group, which has taken banking stocks down sharply.

On Saturday morning it was announced that the taxpayer is taking a controlling share of 65% in Lloyds Banking Group, up from the previous 43%. The government has said new lending from Lloyds will jump to £28bn in the next two years, dwarfing similar figures from Northern Rock and RBS. Shares have already dropped 7% in early trading this morning.

It has also dragged the pound down, with exchange rates across the board falling including GBPEUR and GBPUSD. It could be that the strength we have recently seen in Sterling is now over, and with lots of economic data released later this week, we could see rates for the Euro head back towards parity if there is worse data than expected - not unlikely in the current climate.

Unemployment across the UK will reach over 3 million (just over 10% of the workforce) by the second half of next year, a business group has predicted. The warning comes from the British Chambers of Commerce who have said the economy had worsened "significantly" so far in 2009.

If unemployment does indeed continue to rise at the current rate, then I would expect Sterling to weaken and exchange rates to drop as the UK economy suffers.

As well as the UK economy shrinking, the global economy will shrink for the first time this year since World War II, the World Bank has said. The bank's forecast is gloomier than other estimates, and they predict that by the middle of 2009, industrial output could be as much as 15% lower than 2008, while trade may record the biggest decline in 80 years.

Despite the gloomy outlook for the world economy, the UK remains one of the hardest hit, with bank bailouts the largest out of all the industrialisted nations, in terms of GDP. This is the reason the pound remains so weak compared to other currencies. This is expected to continue.

On Friday it was announced that the US jobless rate jumped in February to 8.1%, according to official figures from the Labor Department. The number of people out of work rose by 651,000 during the month. Both figures were bigger than expected. The number of job cuts in January was revised up to 655,000 while December's losses were pushed up to 681,000.

December's figure was the biggest job loss in a single month since October 1949. The unemployment rate was the highest since December 1983. "It just continues to show the grim state of the labour market, which suggests a deepening US recession," said Joe Manimbo, currency trader at Ruesch International in Washington. GBPUSD (Cable) rose on Friday after the weaker than expected data, however Sterling weakness this morning has already brought rates back down below $1.40.

Finally, in some good news amid the gloom and doom - a court decision in Spain has opened the way for thousands of UK citizens to reclaim some of the tax they paid when they sold their homes there. The High Court in the region of Valencia has ruled in favour of a British couple, Mr and Mrs Roy.

It told the Spanish tax authorities to repay them for being charged a capital gains tax levied at 35% instead of 15%. A spokesman for the Roys' law firm said it was gathering similar cases, with an average claim worth £14,100.

With the refunds being paid in Euros, and with the pound so much weaker now than in recent years, its a great time to convert this back to Sterling - if you are expecting funds to be returned to you, do get in touch with Foremost Currency Group and make sure you achieve the best possible exchange rate.

Lots of data released this week. As always this is likely to cause volatility in exchange rates - for information on how these data releases could affect your particular requirements, please get in touch to let me know which currency you require.

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