2013 with a Silver Lining - Part 1

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Inflation Down, Eurozone on the Brink

AUSTERITY VS INFLATION

Politicians don’t like inflation and current austerity dogmas will curb it in the following years.  Goods and services prices will slightly decrease in the UK, US and EU countries. Cutting interest rates even more will prove to be useless: the percentage of inflation we have now derives in fact from the rise of commodity, energy and food prices.  In the UK, after the peak at 2.7%  in October, inflation will decrease to 2,3% in 2013 and drop to 1,8% in 2015. The 1% rise in benefits for the next few years decided by the chancellor George Osborne in the Autumn Statement – which is under the level of inflation – would result in important cuts.  Both Eurozone and the United States will follow British trends, while China expects a big rise in 2014.

INTEREST RATES, HOLD ON

While bankers and politicians claim a further (and desperate) cut of interest rates in the attempt to revitalise the global flagging economy, they are likely to be steady for the next few years. The Bank of England will keep them at 0.50% until 2016. A rise to 0.75% is expected for 2017. Same for the ECB (now at 0.75%) and the FED, that will maintain them between 0 and 0.25% until 2015. In Japan we won’t see sub-zero interest rates, but they will stay around 0% for the following seasons.

EURO’S STEADY DECLINE AGAINST STERLING CONTINUES

The Euro has declined against Sterling for the past five years and the drop is likely to continue as we enter 2013. Five years ago the booming Euro was 1.50 to the pound, but the drop largely due to Eurozone issues, leaving the Euro at 1.25.  Shorting the Euro or buying Sterling is likely to be the best bet for 2013  with EU difficulties such as the Greek and Spanish crises raise their ugly heads once more. Sterling on the other hand is likely to continue to show more of its recent strength, assisted by figures indicating the UK economy is on its road to a slow recovery.  A rate of €1.40 to the pound is not unthinkable for 2013.

With contribution from Luca Rossi, a fellow journalist working for ADVFN.

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