Economic fears, deficit-busting spending cuts and even recent weather-related chaos will make for a rocky start to 2011 for the British pound.
But currency experts predict a year of two halves and expect the value of sterling to strengthen later in the year – meaning cheaper holidays for Britons and lowering the cost of imports.
The key driver will be the prospect of an interest rate hike from the record low of 0.5 per cent, analysts said, which will pull the value of the pound up with it.
While sterling moved away from the lows seen during the recession, it has struggled to make any significant progress in 2010 as economic woes in the UK and Europe plagued the markets.
Manufacturers have enjoyed stronger growth in recent months as exporters take advantage of the attractively low pound.
But the deepening debt crisis in the eurozone – led by Greece, Ireland and most recently Spain – could end this trend.
Daniel Wright, associate director at foreign exchange brokers currencies.co.uk, said sterling would take one step backwards and two steps forward in 2011.
He said: “The cold weather is going to leave an unhappy end to the year for the pound, which will roll on into next year. It’s frozen sterling’s chances of making a recovery.
“Retail sales have not been good for this time of year, and the Boxing Day sales are likely to be hit as well.”
Mr Wright said the ongoing eurozone crisis would continue to stifle the pound’s progress next year.
“The pound has turned a corner against the euro, slowly but surely we’re creeping up.
“But although there are numerous problems in the eurozone – there are problems in the UK too, which are hindering the pound from pushing through the 1.20 barrier.
“We’re still classed as a European currency. We’re drawn in to bail them out. The loan we gave to Ireland virtually wipes out our spending cuts.”
But Mr Wright said as the year progresses, the economy should strengthen and improve chances of an interest rate hike.
“We expect interest rates to increase up to six fold to three per cent over the next two years,” he said.
“Everytime interest rates rise there is a positive effect on the currency concerned. We expect interest rates to rise and the economy to start to grow again.”
Holidays next summer in Europe should be cheaper as the situation in the eurozone “blows up” and the euro devalues, Mr Wright added.
Mark O’Sullivan, head of trading at Currencies Direct, expects the first half of 2011 to be a challenge for sterling.
“In the first-half of the year, there will be a VAT rise, economic numbers are going to be soft, and unemployment is likely to rise as austerity measures kick in.”
Mr O’Sullivan said commodity-based currencies have been strong in 2010 as the pound recently hit a 25-year-low against the Australian dollar at 1.57.
While a weak euro is good for travel and import trade, Mr Sullivan warned it was not in the UK’s interest to see a prolonged slump in the euro.
He said: “The UK banks are heavily involved in Ireland, which is why we stepped in. Sovereign debt will just drag the UK with it.”