Monday 21st January

UK Forecasts Still Gloomy
The UK economy will slow sharply in 2008 according to a report by the Ernst & Young Item Club but we are unlikely to face a recession. The model used to make the forecast is the same as that used by the Treasury and predicts that the economy will grow at a rate of 1.8% in 2008 as opposed to 3.1% growth in 2007. As a result the report expects interest rates to be cut a number of times this year from the current level of 5.5% which is one of the main reasons why Sterling has dropped so dramatically over the last couple of months. In fact recently Sterling fell to the lowest levels in 10 years against the Aussie Dollar, the lowest in 8 months against the US Dollar and the lowest ever against the Euro as the markets price in the expected cuts by the Bank of England’s Monetary Policy Committee. Traditionally interest rate cuts weaken that currency because investors and speculators are more likely to move their funds into assets with a higher return in another currency. Markets will price in these decisions in advance based on the probability of a rate change and given the fact that many sectors now view rate cuts in the UK as inevitable, the value of the pound has plummeted.

The state of the economy can also be measured in terms of consumer behaviour and retail sales figures for December were down 0.4% from November even though many retailers discounted heavily in the run up to Christmas. Some reported figures which were the worst in 13 years according to the Office for National Statistics. Vicky Redwood of Capital Economics said “surely this is enough to cement a February rate cut and more cuts thereafter”. Howard Archer of Global Insight also thinks this problem is likely to get worse because “increasing concerns about the economic outlook are likely to further encourage consumers to tighten their belts”.

Whilst the Pound has fallen sharply in value, many of you will be asking should I buy now or should I hold on? In truth it is a very difficult question but certainly burying your head in the sand and saying “I will wait till it gets better” and relying on hope will not help you. Whilst the overall trend has been down for Sterling, there will be times of positive movement and last week was a great example of that with the Euro. During one day the Pound gained over 1.5% after comments made by Yves Mersch (a member of the ECB) that the ECB may not be able to raise rates in Europe after all. Whilst Sterling’s gains were short lived, it was a great example of how quickly and unexpectedly the markets can move and many who were in a position to act quickly were able to take advantage of this. By staying in contact with your account manager and by giving them the relevant information about timescales for the currency, you are maximizing your chances of buying on a positive spike in the market. It will also help to decide whether you use a spot, limit, or forward contract to secure your exchange rate. The big news to watch out for this week is the minutes of the Bank of England’s meeting earlier this month where they voted to hold interest rates for January. Make sure you are ready to act if required and if you do not have an account set up as of yet why delay any further as it could prove costly.

Please email me djw@currencies.co.uk if you have any future currency requirements and i will happily provide an excellent service alongside a great rate.

Http://www.currencies.co.uk