This year promises to be another interesting one for currency markets.

The policy approach adopted by the US and European central banks could not be more divergent with the US Fed focusing on supporting growth and worrying about the consequences for deficits and inflation later, while the ECB is forced to balance a resurgent German economy with the weakness in the periphery, along with a rise in inflation.

The Fed is determined to continue with its loose monetary policy, or quantitative easing (QE2), strategy. It will be interesting to see if QE2 supports stronger growth in the US economy; we think it will ultimately prove successful, leading to higher interest rates and a stronger dollar.

In Europe, the sovereign debt crisis continues to dominate. Investors will look to developments in Portugal and Spain. Poor bond auctions or signs that EU officials are slow to react to rising peripheral bond yields will further undermine the euro.

On the basis of a strengthening US economy and EU periphery worries, we target $1.20 versus the euro in the first quarter (currently $1.3050). The risk to this view is if the market starts to focus on the deficit problems in the US.

In the UK, house prices have stabilised and the consumer is spending again. The market has bought into the deficit-reduction plan and worries of a sovereign downgrade seem to have abated. On this basis, coupled with the structural problems in the Eurozone, we see room for euro depreciation versus sterling to 78p from its current level of 84.5p.

Vincent Killeen is a senior manager of Bank of Ireland Global Markets