Crystal balls show sterling rate rise

FOREIGN exchange specialists expect the sterling-euro exchange rate to settle between 1.20 and 1.30 this year.

HiFX marketing director Mark Bodega said the end of 2010 looked more encouraging than the previous two years. The advantage of a weaker pound was that foreign investors and tourists were flowing back in.

Another positive was the current boost to exports, which he predicted would continue and strengthen into 2011.

He said a neutral valuation for GBP/EUR would come in between 1.20- 1.25.

"With quantitative easing expected to continue in the US and the sovereign debt crisis in the EU, the pound has the twofold advantage of not requiring further quantitative easing and the flexibility of not being in the EU. Therefore, it is expected to remain resilient and strengthen into 2011.

"We must not forget that sterling is still in undervalued territory, having fallen aggressively in the credit crisis and the readjustment of a more competitive currency is what is seen as the protective cushion for the UK economy into 2011."

At Moneycorp, foreign exchange specialist David Kerns said the UK’s recent brighter economic conditions were likely to continue, but the pace of growth would slow and the possibility of declining property prices in 2011 may cause the pound to retreat.

"Short term, we may see further euro weakness and sterling taking advantage to levels around 1.20.

"In the unlikely event that Portugal and then Spain suffer contagion from the current issues faced by Ireland, then GBP/EUR could rise above 1.30, although this remains unlikely.

"The most likely scenario for 2011 will be for the UK to see weakening inflationary pressures coupled with slowing growth, and the eurozone managing to muddle on through the current crisis with a return to slow but unimpressive growth among all 16 nations. The euro will again be seen as a reserve currency of choice, pressuring the GBP/EUR rate lower throughout 2011."

Chief economist at World First, Jeremy Cook, thought that currency markets would continue to be volatile and unpredictable for a while yet. He said that, after Greece and Ireland, Portugal and Spain were next in line to be set upon by markets over their debt problems.

"Portugal and Spain are already in the crosshairs and I think it is merely a case of when, and not if, we see market fears over their debts and banking systems.

"The UK is not insulated from these problems, however, and should we see a pronounced slump in EU growth prospects, that will reflect back on to us.

"We will also have to deal with the coalition’s cuts, making an impact on what is still a weak, albeit recovering, UK economy.

"On balance, we think that the European risks trump those of the UK and subsequently we expect sterling to rise against the euro in 2011 and, in 12 months’ time, we would be looking for a rate of around 1.27."