Prospects for Pound Sterling

With the UK economy taking a sharp downturn, prospects for the pound have deteriorated. A recession looks increasingly likely. Consumer spending is falling on the back of falling house prices. This downturn is made more problematic by the levels of debt in the UK. Both personal and public sector debt have grown to record levels leaving the economy little room for manoeuvre.

Although rising inflation make interest cuts difficult, the weakness of the UK economy will be reflected in a weaker currency. The only issue in favour of the Pound is the fact that our main trading partners US and Eurozone are facing similar difficulties. By many standards of purchasing power parity, the Euro looks overvalued. If the Euro enters into recession, the ECB may come under increasing pressure to cut rates (something they have been reluctant to do)

The US economy was the first into a slowdown and so maybe the first to emerge. With US interest rates at 2% there is little further that they can fall. Also the dollar has been falling for so long, that on purchasing power parity standards it is starting to look increasingly attractive. (Compare price of buying a mac computer in UK and US)