Outlook for Pound Sterling

Against the dollar, the UK Pound sterling has experienced a rapid appreciation in the past couple of years. The Pound has strengthened against a backdrop of a strong economy, low inflation and relatively high interest rates. However, recent events have cause many to predict a lower value of the £ in 2008.

The Global Credit Crisis may hit the UK particularly hard.

Large Trade Deficit. The UK has a large trade deficit of 6% of GDP. This has been masked by hot money flows. However, the trade deficit suggests a fundamental imbalance and it is likely that a devaluation will be needed to rectify this.

Falling Interest Rates. UK interest rates are currently higher than the European Union and the US. However, a slowing economy and falling house prices make it more likely that interest rates will fall in 2008. Some predict interest rates could fall as low as 4%. If this was to occur there would be a big fall in the value of the £ as hot money flows dry up.

Slowing Economy. Despite large numbers of shoppers over the Christmas period, there is still concern that the economy could turn as falling house prices impact on consumer confidence and spending.

HSBC predicts the pound will plummet to $1.76 against the dollar over the next 15 months.

• Forecast for £ Sterling 2008