Expert View: Currency Forecasts For 2011

No amount of technical analysis or research can give a definitive answer about what is going to happen in the exchange rates with any certainty. However, we can consider the currency events of last year, growth forecasts for 2011 and how these could impact Sterling exchange rates against a range of other currencies in to 2011.

The Pound – Will It Strengthen?

With the UK recovery stilted but marginally better than expected there is a reasonable possibility that we could see an interest rate hike in the first half of the year. Interest rate rises nearly always strengthen a currency and this is a very important determining factor which will have a large-scale effect on Sterling. If (when) the Bank of England do decide do raise interest rates, we could expect some strengthening against the Euro depending on Eurozone data at the time. Whether or not the Pound will similarly rise against the Dollar will be co-dependent on how monetary policy plays out in the US see detail more below. It is important to remember that although the UK economy is forecast to grow at 2.1% during 2011, the economic landscape remains challenging. It seems easy to forget that the UK deficit was at 9% GDP at the height of the crisis; a figure which was very close to that of Greece, Ireland and Spain. Such huge economic problems needed definitive action but currency speculators look closely at every cut, increase and announcement made in fiscal policy to help decide where to place their money. In this vein, the impact of the January VAT rise may have far reaching implications on many levels. There has been much debate over whether the effect on retail and consumer spending could have a negative impact on the economy in the short-term and a subsequent effect on the strength of Sterling. Whilst the area of retail is therefore vulnerable, manufacturing has been the sector that has shone through in the UK, and already proved its ability to help lift Sterling on the days that manufacturing figures are released. It is therefore important to stay on top of these day to day data releases and the easiest way is to be in touch with your currency broker who will monitor the markets on your behalf and help you set a target rate of exchange. Manufacturing has been boosted by growing exports, which some have hailed as the key sector that will pull the UK further into growth. This is very dependent therefore on markets overseas and in particular Europe which is a main trading partner. Strict UK austerity measures are helping Sterling to regain some stability and if we see any substantial moves above the resistance level of 1.20 against the Euro it may open the way for a more sustained recovery later in 2011.

The Euro – Is It In Danger?

It was the economic crisis of the 1970s that led to the first plans for a single currency but the Euro was not launched until 1st January 1999 and it was not until 3 years later in 2002 that it actually became a cash currency. Some headlines at the tail-end of 2010 were scaremongering the death of the euro and it was obviously causing concern for some of my clients – especially those needing a Sterling to Euro transfer to pay for a property in 2011. However, to revert back or establish a new currency, a country would have to consider the transactional costs of converting cash, decide at what rate to convert contracts, mortgages and bank accounts, protect against capital flight and decide on the exchange rate on a given date to transfer. When you consider the length of time it took for countries to opt in to the single currency it is a fair assumption that in the hypothetical event that they did want to leave any plans to opt out will take years to come to fruition. So although the Euro is safe for now it has certainly been a year of turmoil. The problems in the Eurozone caused the Euro to lose some of its status as a safe haven currency in 2010 but with global uncertainly affecting a basket of currencies it has managed to keep its head above the water. Some are forecasting that Euro Dollar could reach parity throughout the year of 2011. The biggest problem for the Euro-zone is preventing the spread of sovereign debt between nations and managing the discrepancies between the strength of nations. Whilst Germany for example, has pulled into recovery and had some very strong economic data, Ireland, Portugal and Spain have suffered credit rating downgrades. The positive news is that nations have really committed to making more back-up funds available and as the case of Ireland proves, nations will be forced to accept rescue funds to stem the danger that they pose to others. Realistically however, the Euro-zone is severely lagging behind the UK and the US in terms of recovery from the crisis. It not only has the debt problems to solve and the problems that austerity measures in themselves can bring, but lack of confidence from investors who now put funds into the Euro when risk appetite is high rather than backing up funds in Euros as a safe haven. The conclusion then, is that the Euro itself is not in danger of collapse, but may struggle against other major currencies as well as smaller Eastern European currencies for some time.

The Us Dollar – Is It Back On Track?

In November, we saw the US Dollar drop to its lowest levels in two years against Sterling. Great news for UK based buyers purchasing property or investments in the US! However since then the Dollar has regained strength and most forecasters agree that the tide is turning. The end of 2010 saw a general shift of sentiment towards the US economy with the emerging consensus being optimism for growth into 2011. The Dollar had been weighed down by the lengthy pre-empting of quantitative easing by the Federal Reserve, but it became stronger after the decision to implement this was taken in November to help boost the struggling economy. Although economic data from the US since then could be still described as a little patchy, the key areas of unemployment, payroll growth and manufacturing have shown signs of improvement. 2011 has opened with manufacturing shown to be expanding at the fastest pace in seven months and the general view now being that growth is back on track. The other factor at play is the Dollar’s position as a safe-haven currency in the world’s largest economy. Throughout 2010, influences from the broader markets and weaknesses in the Euro zone in particular, have pushed the currency higher in times of global economic uncertainty when currency investors need to ensure their funds are low-risk. The Dollar’s future is therefore in part dependent on how quickly Europe stems its own crisis. Sterling rates against the US Dollar fluctuated by 13 percent over the course of 2010 in an extremely volatile year. There is still much variation in the extent to which nations across the globe are pulling themselves into recovery and the Dollar of all currencies will always be subject to these influences beyond its own economy. For that reason, alongside the outlook for a strengthening Dollar, those requiring Sterling to US Dollar transfers should be cautious of market fluctuations and look into protective strategies such as using a forward contract to guarantee an exchange rate in advance of the transfer.