British Pound

1. British Pound Team IV Aliya Riddle Andrew Kenna Steve Roszak GBP/USD = 1.9104 $/₤ (February 22, 2005 4:51 PM)

2. Short Run Analysis Technical Analysis GBP/USD Trends for the week 2/14 – 2/21

3. Short Run Analysis Technical Analysis GBP/USD Trends for the week 2/14 – 2/21

4. Recent Trends Short RunPrice Channel Past Week

5. Recent Short Run TrendsAscending Triangle Past Week

6. Technical Analysis The movement of the British pound over the last week shows an increasing price channel and an ascending triangle. Technical Analysis suggests the pound is likely to slightly increase or remain steady in the near future.

7. Recent News and Events Recent financial news and analysis reports also suggest a slight appreciation of the British Pound. • Many analysts predict the pound to recover after a major depreciation in January 2005. • Recent reports announced a surplus in British government financing. A higher than expected surplus in Public Sector Net Borrowing will positively effect GBP/USD. • January 2004 showed a rebound in retail sales in England. Better numbers are expected to boost economic growth and the economic strength of the pound. • A recent British housing report shows an excellent performance in the local housing industry. • Strong Employment Data and a low unemployment rate are also expected to help the economy. All these events are expected to positively effect the British Pound in the near future

8. Short Run Prediction • Based on technical analysis and recent economic indicators, we expect the British pound to slightly appreciate or at least remain steady over the next few weeks. • We predict that the British pound will increase from 1.9104 $/₤ to approximately 1.9250 $/₤ over the next week.

9. Long Run AnalysisPurchasing Power ParityInflation Approach P = eP* e = P/P* %Change in e = Inflation United States - Inflation Great Britain • Inflation Measures based on • 2004 Levels • January Levels • IMF Predictions • Central Bank Forecasts

10. 2004 Levels 2004 Inflation United States = 3.26% 2004 Inflation Great Britain = 1.6% %Change in e = 3.26% - 1.6% = + 1.66% 1.66% Depreciation of the Dollar (Pound Appreciation) Current GBP/USD = 1.9104 Implied Year-end GBP/USD = 1.942

11. January 2005 Levels Inflation United States = 2.2% Inflation Great Britain = 1.6% %Change in e = 2.2% - 1.6% = .6% .6% Depreciation of the Dollar (Pound Appreciation) Current GBP/USD = 1.9104 Implied Year-end GBP/USD = 1.921

12. IMF Forecasts Inflation United States = 3.0% Inflation Great Britain = 1.9% %Change in e = 3.0% - 1.9% = 1.1% 1.1% Depreciation of the Dollar (Pound Appreciation) Current GBP/USD = 1.9104 Implied Year-end GBP/USD = 1.931

13. Central Bank Forecasts Inflation United States = 2.2% Inflation Great Britain = 2.1% %Change in e = 2.2% - 2.1% .1% Depreciation of the Dollar (Pound Appreciation) Current GBP/USD = 1.9104 Implied Year-end GBP/USD = 1.912

14. Inflation Approach Average exchange rate based on purchasing power parity e = (1.942 + 1.921 + 1.931 + 1.912)/4 = 1.9265 PPP predicts a .84% appreciation of the pound during 2005

15. Uncovered Interest Parity Approach Definition of UIP (1+i*)e’ Profit = - (1+i) = 0 e

16. Uncovered Interest Parity Approach Current United States Interest Rate = 2.50 % Current Great Britain Interest Rate = 4.75 % Solve For e’ (1.0475)/(1.9104)(e’) – (1.0250) = 0 Expected Exchange Rate = 1.869 UIP predicts a 2.2% depreciation of the British Pound Note: 12 Month Future = 1.879500 2 Year Future = 1.860990

17. The interest rate spread does not necessarily guarantee a pound depreciation. The United States and Great Britain have historically had large spreads without major devaluations in the British pound. UIP may not hold between the United States. We predict the Long Run performance to be more representative of the PPP approach. Many analysts from FXstreet also predict a pound appreciation in 2005 and recommend their buyers to long the pound. We predict the pound will continue to improve against the dollar in 2005 and approach 1.95 $/₤ by year end

18. Any Questions?