Thursday, 30 December 2010

Forecast for Sterling, Euro and US Dollar

30th December 2010
Good morning. The pound rose slightly against the US Dollar yesterday, but remained between €1.17 and €1.1740 against the Euro in thinned trade. Today we'll look at the state of Sterling, the Euro and the US Dollar. First the usual snapshot of rates as at 08:30am:

  • GBP/EUR 1.1706
  • GBP/USD 1.5500
  • GBP/AUD 1.5227
  • GBP/NZD 2.0175
  • GBP/CAD 1.5484
  • GBP/CHF 1.4559
  • GBP/ZAR 10.245
  • GBP/JPY 126.27
  • GBP/HUF 326.78
  • EUR/USD 1.3237

Sterling

The pound has been under pressure since last week as higher than expected unemployment data, falling house prices, a hike in taxes, cuts in government spending and softer growth than forecast cloud the economic picture going into 2011.

Analysts said the continued weakness hampered the outlook for future growth. The Financial Times forecast UK house prices will drop as much as 10 percent in 2011 as government spending cuts kick in and access to mortgages remains restricted. Also, last week Bank of England policymaker Paul Fisher said the economy could suffer another period of contraction next year.

All this is likely to pose a dilemma for the BOE in the coming year. A slow recovery will require loose policy to stimulate growth, while tightening may be needed if upward price pressures continue.

So, it's likely that the pound may weaken further as we go into 2011 and trading begins again in earnest.

Euro

Of late the Euro has weakened due to the sovereign debt problems of Ireland, Greece, Italy, Portugal and Spain. The weakness in the single currency is the reason that rates for GBP/EUR are where they are. Sterling is weak and without these debt problems rates would be much much lower.

Recently though the largest economies in the EU, France and Germany, have voices support for the Euro saying it will not fail. Also China has recently offered support.

These developments have calmed the markets and is the reason rates are no longer increasing. Unless we see further issues with debt in the Eurozone it's likely the Euro may regain some of it's strength in 2011 pushing rates lower.

US Dollar

Sterling edged up from near 3-1/2 month lows against the dollar in thin trade on Wednesday, as year-end position adjustments drove trading although a fragile outlook for the UK economy curbed gains.

The problems in the EU and poor UK data has meant that investors returned to the safe haven status of the US Dollar. This demand has strengthened the greenback making it more expensive to purchase. Now that the Euro seems a good alternative to the US Dollar, rates are now moving the other way.

Inflationary concerns however and the fact further Quantitative Easing may be needed may weaken the US Dollar further next year. The question is will the USD weaken further than Sterling? Time will tell but for the remainder of this year we expect rates to stay range bound between $1.53 and $1.57.

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