INTERNATIONAL FINANCIAL OUTLOOK BY LLOYDS TSB

While we have made some adjustments to our currency and interest rate forecasts our core medium-term views are largely unchanged. We continue to look for the US dollar to exhibit broad based appreciation in the year ahead, with emerging market currencies showing the most resilience.
While we have made some adjustments to our currency and interest rate forecasts our core medium-term views are largely unchanged. We continue to look for the US dollar to exhibit broad based appreciation in the year ahead, with emerging market currencies showing the most resilience.

The most important changes this month are higher targets for GBP/USD and EUR/USD in 2011, primarily reflecting higher starting levels since our last Outlook. Our end-2011 targets are at 1.49 and 1.24, respectively. However, event risk is particularly elevated in the coming months, with a ‘silver bullet’ for the sovereign crisis difficult to foresee and a large amount of ‘periphery’ issuance timetabled. The euro could return under strong selling pressure.

On official interest rates, in the UK, rising inflation has not yet trumped growth concerns, but market speculation about higher interest rates has intensified. This could pare back rapidly, leading the pound sharply lower. We maintain our call for the first base rate hike in Q4 2011. In contrast, the US dollar should benefit from stronger US growth, shown in particularly the labour market. We see 10-year Treasury yields at 3.7% at end 2011, rising to 4.6% at end 2012.