Currency watch: pound prepares for pressure

The latest unemployment data from the UK shows that youth unemployment has reached a record amount while the total number of people out of work crept to an 18 month high. Unfortunately this trend is only likely to increase over the next year as the public sector fat is trimmed.

This will obviously weigh on the pound as the associated fall in household income flows through to the High St.

Sterling has had a corking 2011 so far as it rides the latest round of inflationary data. As we said last week, this is not a time to go hiking rates in order to control inflation, as the ensuing contraction on the housing and mortgage markets and the credit lines of small businesses could be catastrophic.

We hope that the minutes from the Bank of England’s latest meeting, which will be published next week, show policy-makers agree with us.
 
While the euro has been the currency "whipping boy" in recent weeks, it has managed to find some backbone of late – although this is more of a result of bond auctions artificially propped up by the ECB than anything else.

We have seen three or four very important debt auctions from members of the so-called "PIGS" (Portugal, Ireland, Greece and Spain), which had they failed would have sounded a death toll for the euro, succeed by some slim margins.

The fact that these sales are being supported by the ECB only postpones the inevitable pain that the EU will have to go through in the coming months. The can is simply being kicked down the road. Naturally this forms the basis of our euro negativity for 2011.
 
Jeremy Cook, chief economist at World First foreign exchange, 21.01.2011