Sterling and Weight Loss Forecasts for 2011

“The western world remains on economic and financial life support”

It is that time of year again when we make rash New Year resolutions and I outline my thoughts on sterling’s prospects for 2011 to help you budget and exchange currency at the best time.

For some inexplicable reason those outside forces which stop me regaining a weight of 5, 10 or even 15 years ago or achieving the fitness levels of an Olympic athlete seem to also affect my ability to forecast where sterling will be this time next year. Perhaps that is for the best as anyone who really believes they can forecast the future in these uncertain and volatile times is, I believe, deluding themselves. A bit like myself with my weight and fitness…

So what did 2010 bring?

A new UK government (albeit a coalition led by the Conservatives and supported by the Liberal Democrats) finally presented a clear plan of action on how the UK government was going to reduce their expenditure by up to 25% over the next 5 years. Initially the market welcomed this, as it gave some much needed clarity on how the UK was going to bring under control its debt despite a reduction in government employment numbers by 500,000.
However, the Bank of England then decided to mumble something about possibly extending their programme of quantitative easing which undermined both sterling and the government’s good work. This possibility receded as UK economic data came in better than expected in the last quarter and inflation continued to stay high.
In the Euro zone the government debt problems came to the fore and threatened the very existence of the Euro zone. I have to ask who, in their right mind, expected Greece and Ireland to march to the same economic beat as Germany? It also seems ever less likely as the German economy has rebounded strongly and exports grow rapidly.
In the USA, the economic recovery proved to be both sluggish and jobless in 2010 and as such the Federal Reserve decided to throw caution to the wind by undertaking a second round of quantitative easing and the US government continue with tax breaks. The level of stimulus being applied to the US economy is without equal after an additional $600bn was thrown at the problem.

While the western world was in desperate straights, the commodity backed countries and their currencies continued to go from strength to strength as China continued to have an insatiable appetite for commodities and its expansion towards being the world’s super economic power within the next 10 to 20 years.

As you can see from the EUR/GBP graph, sterling hit the giddy heights of €1.23/£1 back in July before falling as investors feared the worst in the wake of the Irish debt crisis. Sterling has been undervalued against the euro, and analysts expect the pound to push back towards the mid 1.20’s as the debt crisis envelops Europe.
Against the US dollar, sterling has been up and down in the last year. Looking at the graph, you can see how important it is to take advantage of better exchange rates and fix rates in – we have many clients who locked their US dollars in above $1.60/ £1 and continue to buy at that level.

So what do we have to look forward to in 2011?

I think more of the same is the answer – exchange rates will stay volatile, subject to large and rapid movements in any direction (a bit like my weight and my fitness).

The UK government has to get on top of its expenditure and will do so. I would be surprised if we did revert to further UK quantitative easing as inflation will more than likely stay high and the UK economy continues to recover. In fact we could even see an increase in interest rates and financial markets are expecting a hike in the next 3-6 months.

Will the Euro zone survive? This is the great unknown as we enter 2011. Common sense says no but political will power may mean yes. I would expect sterling to have a similar range against the € in 2011 as it had during 2010 – a high around the 1.25 and low around the 1.13.

In the US the recovery will continue to be slow but I believe jobs will begin to be created. The US$ will continue to benefit from its safe haven status. In 2010 we saw a high of just over 1.60 and a low close to 1.43. 2011 may see a slight widening of this range with the possibility of a higher top end as US debt levels begin to hurt the US$.

China will continue to grow and the commodity backed countries and currencies will continue to benefit. So we should expect the Australian $, the New Zealand $ and the Canadian $ to gain further ground against sterling, the € and the US$.

Would you like to know more?

The above is only a brief outline of our thoughts for 2011. We produce a full report outlining major bank exchange rate forecasts and market comments on a weekly basis. To sign up for a Weekly Currency Note and get your FREE Report go here:

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