New Year and New Rate of VAT

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 in but in the longer term the rise may push inflation higher making an interest rate hike more likely.

Pound Sterling – UK Markets

Sterling has moved lower against both the Euro and the US Dollar since the weekend. Today sees the introduction of the higher rate of VAT and mortgage approvals for November have come in slightly higher than expected at 48,000. The VAT rise is a concern for the Bank of England who have struggled to prevent inflation soaring higher above the 2 percent target and the cost of living for many is spiraling. An interest rate rise will help curb inflation and the impact on Sterling could be positive in the long term however it is unlikely to happen in the immediate future. Good news came from a survey by Deloitte which showed confidence amongst chief financial officers at major UK companies rose in the last quarter of the year with relationships with countries outside the UK being hailed as the engine for growth.

US Dollar – US Markets

The US Dollar spiked against the Euro and Sterling early on Monday. It has since dropped off against the Euro but has continued to make more reserved gains against Sterling after an initial fall. US manufacturing showed improvements, expanding at the fastest pace in seven months with the manufacturing index rising to 57 in December. Construction spending also rose 0.4 percent in November. FOMC minutes are due at 7pm this evening which will provide an analysis of economic conditions and the outlook for interest rate policy.

Euro – European Markets

The single currency has not shaken off sovereign debt fears which look set to continue into 2011 although it has experienced upwards movement against Sterling since Monday. Poor news has come from Germany this morning showing an increase in unemployment by 3000 in December following a drop of 8000 in November.

Other Currencies – Highlights

The Yen fell to a one week low against the Euro following yesterday’s positive US manufacturing data spurring demand for higher yielding securities. The Canadian Dollar was also close to its strongest in two and a half years with crude oil prices soaring. For a live quote or to tell us about your foreign exchange requirements, please call us on +44 (0)20 7740 0000.