Sterling against the Euro - a one way bet in 2008?

Larry Elliott, the economics editor of the Guardian has no doubts in his comment piece in today's Guardian - people contemplating a mid winter break to Italy or Southern Spain or a week in Malta or Cyprus in a few months time should delay no longer and buy their Euros now before the pound sinks further. According to Elliott, all of the economic signals points to a further depreciation of sterling against the Euro in the coming months

He writes:

'The fundamentals of the UK economy necessitate a lower pound. The exchange rate, after all, is merely the price of a currency and under a floating system should adjust to bring the balance of payments into something approaching balance. It has been apparent for the past 10 years that when adjusted for Britain's higher wage costs, the effective exchange rate is way out of kilter. The pound is even more overvalued than when it was unceremoniously, but thankfully, booted out of the Exchange Rate Mechanism.'

 What might drag sterling lower in the days and weeks to come?

1. A growing trade deficit with members of the European Union - a trade deficit means that there is a net outflow of sterling across the international exchanges - see the UK's annual trade balances with the USA and with the EU here: View image 
2. A fall in net investment income from external assets earning money in overseas economies
3. Expectations that the Bank of England will move official interest rates lower this spring - quicker than the European Central Bank does. That may make sterling a less attractive currency to hold among yield-hungry international investors. Current official interest rates can be viewed here: View image
4. A change in sentiment - with currency dealers and strategists re-evaluating the overall macroeconomic performance of the UK economy - a currency's strength in the foreign exchange markets is often a reflection of the perceived macroeconomic record in the global economy.

You can read "Get your holiday Euros now" using this link http://www.guardian.co.uk/business/2008/jan/07/economy.sterlingrate

Tutor2u revision presentations on exchange rates

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