Sterling Falls, Pound Declines by 1.6%

We continue our daily look at factors affecting currencies allowing some insight into market conditions affecting exchange rates. Cash and income timing for UK Pensions and QROPS should be considered to maximise the Pension, QROPS and investment income and benefits taken.

Investment market volatility and currency exchange remains a challenge. Things are still very volatile and we are in unique global influencing territory. In conjunction with investment returns, currency exchange continues to concern many expats with UK Pensions, QROPS and now QNUPS.

Sterling plummeted yesterday, as UK GDP data blew away talks of interest-rate rises by the Bank of England in the short-term future. Although the currency has performed strongly so far this year, the pound plunged to $1.5752 charting a hefty 1.6% decline from its higher point of the day, and following figures showing that the UK Economy in the last three months of 2010 had shrunk by 0.5%. This was in opposition to the expected growth of 0.5% and in comparison to the rise of 0.7% in the previous quarter.

While output in the UK was affected by seasonal factors during the fourth quarter, analysts stated that this is once again an example that developed economies continue to struggle with recovery from the financial crisis and global economic slowdown.

Mixed views on sterling’s outlook circulate the markets as sterling’s rally since mid- December appears to be over. The figures are bad news for the government which are due to implement public spending cuts in early 2011. “Whilst yesterday’s GDP figures are backward-looking, they are nevertheless crucial to understanding the resilience of the economy to shocks. It seems that the economy is incredibly vulnerable and with the fiscal tightening yet to fully bite, we will have to brace ourselves for a bumpy ride,” said economist at Daiwa Capital Markets, Europe.

This, however, presents a dilemma for the Bank of England, which now has to juggle a worrying outlook for growth combined with elevated price pressures.

There were positive signs from Europe, however, as the debut bond from the European Financial Stability Facility attracted strong demand from investors.

Demand for the bond is evidence that concerns about the fiscal and debt troubles dragging some EU member countries finally appear to be easing.

The euro strengthened to trade below €1.1625 for the first time in three weeks, hitting a low of €1.1575. Meanwhile, the euro retraced its recent gains against the Dollar as traders positioned themselves ahead of the key data releases. Markets are also on alert for the Federal Reserve interest rate policy decision due to be released today and traders will be watching for whether the Fed’s language reveals a willingness to implement changes or curtail its controversial $600 billion monetary-stimulus plan.

Although the Dollar traded higher against some Currencies, namely GBP, Euro and

AUD, its weakness against the Japanese Yen, NZD and Swiss Franc indicates that it was not the dollar dictating the flows in the foreign exchange market yesterday.

Whilst US economic data is important, it appears that the thematic trades in Europe and Asia have a significant effect on monetary policy and that the strength of US economic reports may not be enough to motivate the Federal Reserve to reduce Quantitative Easing. However the Fed, within the next couple of months, will need to decide if the asset purchase program needs to be extended beyond June.

Gerard Associates Ltd advises expats and people considering living abroad on the technical and currency options available for Pensions, QROPS, QNUPS and investments in a clear format allowing all customers to make an informed choice. Our service encompasses Pensions, investments, currency exchange and guidance on taxation in most popular ‘sunnier’ climates. This with the re-assurance and security of UK authorised and regulated advice – essential tools for your security.

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