steve_eakins.jpgCurrency Forecast 2011

Another year has just passed and 2010 was certainly an extremely rocky ride for sterling exchange rates. The pound lost significant ground against the majority of most major currencies over the course of the year. We saw the pound fluctuate by 13.55% and 11.83% against the US Dollar and Euro respectively. In fact against most of the major economies around­ the globe sterling has weakened anywhere from as little as 0.5% up to a maximum of 13.5% against the likes of the Japanese Yen. Depending on the time of your exchange the losses could have been staggering.

Looking ahead to the first quarter of 2011, I feel the pound may be in line for a similar ride. The UK had to pretty much come to a halt with the adverse weather conditions around Christmas. It was reported that the costs of the big freeze would cost the economy around £1billion a day as airports and shopping centers like Brent Cross in closing down, all on what was supposed to be one of the busiest shopping days of the year.

The figures for the retail sector which contributes to around 60% of GDP in the UK are going to be a big issue in the first quarter.  Good figures may pave the way for some strength but it is looking more likely to be a hinder on the pound and this could raise questions over our ability to fully recover from recession.

When you consider that VAT rises to 20% in the New Year and the government’s austerity measures may start to affect the economy early this year it could be a testing time for the coalition government.  During tough times, the coalition would be heavily scrutinised as well, particularly when you look at the divide caused through the tuition fee bill, passed last month. Political uncertainty is a factor that can cause currency weakness and when you take into account the exposure that the UK has to European debt this could be unfavorable for sterling exchange rates.

This may make current levels to buy foreign currency quite attractive as we recently hit a 4 month high buying the single currency

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Steve Eakins Currency expert and proprietary trader with Currencies.co.uk