Thursday, August 14, 2008

Forecasts for Pound Sterling

Although, the global downturn hit America first, it appears Europe and the UK economies may actually be first to enter negative economic growth and a recession.

The UK economy has been hit by a series of poor data (high inflation, rising unemployment, falling house prices, lower consumer spending). Recently, Mervyn King, gave a downbeat assessment of the UK economy predicting flat economic growth by the end of the year:
"But the unique combination of food and energy price rises and the dislocation of the financial sector will make a difficult adjustment for the UK economy."
Against a backdrop of impending recession, the Pound has fallen from its previous peaks against the dollar. There are various factors contributing to the recent deterioration in Pound Sterling
  • UK house prices are falling by 12% a year - with prospects of more falls to come. House prices in the UK are very important because so much wealth is tied up in people's housing. Lower house prices slow consumer spending and put downward pressure on interest rates.
  • Prospects of Recession.
  • High Inflation.
  • Sterling's relative strength against the dollar, masks its greater weakness against a basket of other currencies. The Pound sterling, on a trade weighted index, is now at its lowest level since 1996.

The Pound is Weak but so is Euro and Dollar

However, although the UK economy is weak and at risk of recession, its main international competitors are in a similar situation. Both the US and Eurozone are struggling with the combined effects of cost push inflation, the credit crunch and prospects of recession. Given the general weakness of other currencies, the Pound is unlikely to fall significantly against the Euro and Dollar - If only because these currencies are likely to be weak over the next 12 months.

For example, the Dollar has rallied in recent weeks, but, the economic fundamentals in America still remain weak. Due to extensive expansionary fiscal and monetary policy, growth in US has been maintained; but, this may prove to be a mere temporary respite before the coming recession.


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