Despite of sterling’s weakening in the forex market and the depressing GDP figures, PM David Cameron’s Chancellor of the Exchequer and the Business Secretary both admitted that there is alternative plan for the UK economy. The coalition government will push-through with its original economic program, which include budget cuts for many public projects and services.

Many are fearful about the possibility that the United Kingdom will again undergo a recession. The threat of a double-dip recession seems to become more probable considering the various indicators, such as the GDP slide, the high unemployment and the soaring inflation rate. The markets are very cautious at the moment when it comes to the status of British economy.

UK’s coalition government seems to be repeating the economic policies of the Thatcher’s era. The economic motto then was ‘There is no alternative.’ As what was proven in the past, the adoption of an inflexible economic policy can prove to be disastrous. The single-minded determination of David Cameron’s coalition government in slashing the budget can jeopardise the already fragile economic recovery. One does not need to be an economist to realise the detrimental effect of government budget cuts in terms of economic growth.

If public spending is reduceed, the forex value of the sterling, the value of British stocks and the productivity of the private sector will also suffer. This is primarily because of the reduction in the demands from the public sector in terms of public constructions, basic services and other government-funded projects.

The Prime Minister has emphasized the importance of reducing the budget deficit, which the current administration has inherited from its predecessor. The Prime Minister said that slashing the deficit is necessary for economic growth. However, many experts disagree with this stance. They say that instead of stimulating growth, the budget cuts will only worsen the situation.

Given the various dismal economic figures, the coalition government is now being subjected under strong pressure to provide stimulus for the economy. The government might be persuaded to prematurely implement its economic stimulus programs. These may include both monetary and non-monetary incentives. Some recommended the exemption of smaller companies from many tedious and redundant government requirements. It can also help if some basic changes will be made to the employment tribunal law. Both legislative and financial aids can contribute in stimulating economic recovery.

The latest official GDP data from the Office for National Statistics (ONS) indicated a 0.5% negative growth for the last three months of 2010. This totally opposite from what many pundit have predicted about the economy. It really came as a shock for policymakers, experts and investors. Fears over a possible double-dip recession in the United Kingdom resonated both in the stock market and foreign exchange market.

Those who are interested in forex trading and in equity investments are now a bit cautious when it comes to British-related assets being traded in the markets. If another negative GDP growth is recorded for the first quarter of the current year, the United Kingdom would be considered to be back in recession. As the forex and domestic value of the sterling is eroded, Britain is also threatened by a period of stagflation.

If there is one positive implication of a plunging GDP, it would be the less likelihood that the Bank of England will raise the interest rates anytime soon. This would be good news for all borrowers – both ordinary individuals and businesses. Of course, it would also come as welcomed news for millions of British owners who are on variable mortgages.

It seems that George Osborne is too defensive and even in denial about the shocking GDP figure. He insisted that it can be mainly blamed on bad weather that hampered agricultural production and product distribution. However, the Office for National Statistics has clarified that even with good weather, the GDP for the fourth quarter last year would still have been ‘flattish.’

The 0.5% base interest rates being imposed by the Bank of England have been unchanged for more than one year already. The really interesting about this particular level of interest rates is that it is the lowest level in the past three-hundred years. Of course, the main objective of keeping the rates at very low level is to provide greater liquidity by encouraging borrowers to secure loans, which may either be invested or spent. On the other hand, the rising inflation is now exerting pressure on the Bank of England. Raising the interest rates will be inevitable but it should be well-calibrated. Aside from its effect on the stock market and on the forex value of the sterling, increasing the interest rates can have serious impact on the entire economy.

Bond holders and savers will be among those who will immediately benefit if the interest rates are increased. This is because the nominal income from savings and bonds will increase. On the other hand, the bond markets and the value of the sterling in the forex market will also benefit, at least in the short-term. Since the potential incomes from bonds will be higher, many investors will become interested in investing in bonds. The demand for the currency of a country with high interest rates will also increase, thereby strengthening the value of its currency.

Nonetheless, the trading trends in the financial markets are not the most important components of an economy. They are just indicators, which are sometimes over-valued. Those who want to exploit the situation and simply want to make money through the forex market will only benefit in short term because the real economic factors will eventually become obvious. Any market growth that is not backed by actual economic growth such as higher production is destined to fail. It would be just a market bubble supported only by speculations.

Although financial trading thrives in speculations and anticipations, actual wealth is not created by investors and market speculators. The sum of all goods and services as expressed in terms of GDP is the actual wealth of a nation. In the long run, higher interest rates will only become suspicious and may be associated with high investment risks without the backing of other more solid economic factors.

The profitability of the financial markets, including the forex market will only be sustainable if there is actual wealth that is created. Otherwise, unrestrained market growth will only lead to economic collapse. A very low interest rate and a soaring inflation are bad economic combination. The Bank of England has to eventually increase the interest rates to prevent a catastrophic hyperinflation scenario. On the other hand, this is a difficult balancing act because it would surely hurt the credit market as the borrowing costs will inevitably become less affordable. The current situation is pointing to an important turning point in the economy. The era of cheap loans and investment booms (fuelled by over-valued speculations) may soon give way to a more stable and regulated economic trends.

The holiday season has only given short reprieve for eurozone worries. The financial markets, including the forex market, are now again in a panic mood about the sovereign debt crisis in the eurozone. Global financial markets are particularly worried about Portugal. It is expected that before this year ends the country will soon follow the path of Greece and Ireland in seeking the help of the European Union and International Monetary Fund. Portugal may eventually need to be bailed-out.

Portugal is now under the spotlight of the global financial sector. The eurozone sovereign debt crisis is again dominating the financial news headlines. Investors in the stock market and foreign exchange market are now again in a panic mode. One does not really need to learn forex trading or become an economist to realize the serious impact of the eurozone debt crisis on the financial sector and on the global economy in general.

Many forex traders and stock market investors perceive that Portugal is creating an unsustainable balloon debt that may soon burst. The financial sector is worried about the fact that Portugal is again attempting to raise funds by borrowing. Portugal has initiated the sell of government bonds on Wednesday (January 12). It is offering ten-year government bonds, making it the first eurozone country to sell its debt early in the year. There is a distinct probability that this auction will fail considering that existing bond investors are now selling off their bond holdings.

The yield of Portugal’s ten-year bonds rose to 7% in the past two months. This meant that many bond holders are selling their bond holdings at lower prices. This implies that they do not anymore have high confidence on Portuguese government bonds. Coincidentally, the 7% increase in the bond yield is also considered as the ‘magic’ number that seems to indicate an imminent financial collapse similar to what happened to Greece and Ireland.

Unlike Greece, government extravagance and budget mismanagement are not the main problems being faced by Portugal. Before the eurozone crisis was triggered by the Greek financial meltdown, Portugal’s sovereign debt was manageable. However, the economy of this Iberian country is relatively stagnant and its private sector has large debts. The very lenient interest rates and policies of Portuguese banks have encouraged many borrowers but also created an economic bubble.

Many of those who make money through the forex market are worrying about the possibility that Portugal will eventually need to be bailed-out because of its unmanageable finances.

On the other hand, some glimmer of hope was seen when both China and Japan pledged to give their support to the economically embattled eurozone. Japan has announced that it will buy bonds issued by the bail-out funds. Meanwhile, China promised that it will continue its investments in Spanish government bonds.

In spite of the support pledges from Asia’s two largest economies and despite of the political will of eurozone policymakers, the fundamental problem of the region is not fully addressed. There is still no long-term solution and the permanent ‘bail-out’ fund available is very small to cover all possible emergency financial needs of the member states. There are three main suggestions on how to address the problem. First is to significantly increase the seed fund. Second is to issue eurozone-wide debt instruments. The third option is for the European Central Bank to initiate quantitative easing.

The forex rally of the British currency against the euro continued last Friday (January 7). The sterling was able to breakthrough the €1.20 level, which was the highest level reached by the sterling against the euro since the month of September of last year.

After posting some significant losses in the foreign exchange market during the holiday season, the sterling has steadily recovered early last week. The pound was trading at €1.16 during the New Year but it rose to €1.201 last Friday (January 7).

According to the report of Reuters, most analysts and forex traders think that the main reason behind the recovery of the pound against the euro was the selloff of funds related to the euro as investors are again in panic mode over the sovereign debt situation of the eurozone. Hence, the recent strength of the pound was significantly lifted by the weakness of the euro. Meanwhile, similar strong position was achieved by the pound against the US dollar as the latest employment figures in the US disappointed the bullish predictions of the markets.

The continued recovery of the sterling against the euro is an indication of the declining investors’ confidence on the eurozone economies. It is predicted that the single currency will slide 2.1% of its value against the British currency. This would be the largest weekly slide of the euro since the middle part of the November last year.

If a currency trader is interested to make money through the forex market, it would be a good strategy to take advantage of the forex trends of the sterling and the euro. The bullish trend of the sterling, however, is unlikely to be on a long-term basis according to some analysts.

The continued rally of the sterling is unlikely to last for long because of the recent report that the economy of the United Kingdom will be downgraded to a less important position by the year 2050. The economic experts working for PricewaterhouseCoopers have pointed out that UK is unsuccessful in establishing its presence and dominance in the emerging markets. Presently, the United Kingdom is at the number six position in terms of economic strength. It is trailing not far behind the United States, Japan, China, Germany and France. Unlike other strong and developing economies, however, UK economy is not efficiently exploiting the opportunities offered by the emerging markets.

It is predicted that by the year 2050 the economy of the United Kingdom will have been surpassed by the biggest developing economies at present, namely, India, Brazil, Russia and Mexico. This will put the United Kingdom at the ninth spot. Nonetheless, the UK economy may still have enough time to adapt.

The predictions for the forex performance of the sterling are generally optimistic for this year. Many economic experts agree that the sterling will modestly strengthen its position against the dollar and the euro. According to a survey conducted by Hargreaves Lansdowne, it is predicted that the British currency is likely to be in a bullish trend this year, which could range from €1.05 to €1.35. Most of the experts who were polled see the sterling rising above the €1.25 mark. Meanwhile, the forecasts for sterling’s performance against the US currency are also optimistic, ranging from $1.40 to $1.80.

If the Bank of England will change its current policy about the low interest rates, there would be fewer factors that will hold back the bullish trend of the sterling.