2011 Kicks Off With UK VAT Rise
UK markets are re-opening after the New Year break to a VAT increase which has risen from 17.5 to 20 percent. Although the impact on the currency is likely to have already been factored in Sterling will be watched closely over the coming weeks. Business groups are warning about the likely negative effect on consumer spending but in the longer term the rise may push inflation higher making an interest rate hike more likely. In terms of short term movements this week, UK markets have opened with Sterling at the 1.56 levels against the Dollar and the 1.16 levels against the Euro. The Pound has experienced fairly varied and volatile movement against the Euro and Dollar since the weekend so far – as well as gaining on the Australian Dollar. Economic news is focusing around very strong manufacturing figures coming out of the US as well as the new VAT rise in the UK. The US manufacturing figures have added to growing optimism for a strengthening US economy into the coming year and there has been a certain amount of hype over whether the UK VAT rise will have a negative impact on retail figures and consumer spending which could therefore bring a wave of data to make Sterling more vulnerable. In terms of what may move the exchange rates this week there is a significant amount of data from Europe on the remaining days of this week such as retail sales and unemployment figures, and significant employment and payroll statistics from the US on Thursday and Friday which is positive as expected, may push the Dollar higher.