Foreign Exchange

Phil McHugh from currencies direct

The UK pre-budget report came and went and the economists and the politicians digested it in earnest. Naturally there was a heavy focus on the report due to the impending election and also the dire health of the UK economy. Measures included an increase in National Insurance and a public sector freeze on pay limited to 1% leave the ability to reduce the deficit in half within 4 years looking very doubtful.

Sterling has not reacted too badly however but going forward I feel the words "deficit", "credit rating" and "downgrade" will be heard more and more to the detriment of sterling. For the UK Darling has already confirmed that the deficit will rise before falling so he has bought some timehowever the credit agencies may not be convinced that the plans set out will achieve the objective of halving within 4 years. A close eye will be cast over the health of UK finances and sterling will be vulnerable on weaker numbers than forecast; the same is true on GDP forecasts as the budget is reliant on growth of 1-1.5% next year and up to 3.5% the following year.

This years GDP forecasts from Darling are looking about to come in about one percent out- such inaccuracies will not be acceptable going into 2010 and 2011. The pound again dropped below the key 1.10 level and looked vulnerable for a fresh push towards parity. However as sterling started to look vulnerable at the end of 2009; cue problems in the Eurozone. Greece was downgraded by credit agency Fitch and then Austria experienced banking problems. Confidence in the euro has been heavily shaken and structurally it is starting to look fragile with concerns surrounding Ireland, Portugal and Spain along with Eastern European nations.

Within two weeks the euro has shed 5% against the USD as investors pull away from the euro and this has allowed the pound to piggy back on these issues back towards 1.13. Ongoing issues could seriously undermine the euro which has been bought into as an alternative to the USD. In 2010 this could be the catalyst for GBP/EUR to push on towards 1.20- this will not be down to a strong pound but a weakening euro. In addition this move could be enforced if the fourth quarter UK GDP data shows an official exit from the recession…

Please feel free to contact me at: phil.m@currenciesdirect.com and I will endevour to answer your questions.

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