Sterling Gains Strength

This morning we have seen Sterling gain strength against a basket of major currencies.

As you can see from the GBPEUR chart below, the exchange rate for this currency pair is now close to the highest in nearly 3 months.









The main reason for this is Euro weakness caused by bug budget deficits in some EU countries.

The European Commission has taken disciplinary steps to tackle swelling budget deficits in six EU countries. It said that France, Greece, Spain, Ireland, Latvia and Malta had breached EU rules by allowing their budget deficits to exceed 3% of GDP in 2008.

The global downturn has taken its toll on public finances as countries try to spend their way out of recession. The Commission said it would issue a deadline in March for the countries to reduce their deficits. As the global recession takes hold, it has provided an opportunity to secure Euros at much higher rates than available of late.

If you have a Euro requirement, consider fixing your rate sooner rather than later, as due to further rate cuts expected by the Bank of England, this could be short lived as the pound weakens this year.

Bank of England and Sterling
The Bank of England is seeking approval from the government for a series of measures aimed at increasing the supply of money in the economy. Technically known as quantitative easing, the aim of the process is to attempt to increase the amount of funds in the UK banking system. In real terms, it means creating money from nowhere to try to increase liquidity in the markets.

The hope is that this will make it easier for the commercial banks to start to increase their lending levels. Analysts said the Bank could start to introduce measures within days.

The bank's decision to introduce quantitative easing was unanimously agreed by its nine-member Monetary Policy Committee (MPC) at their meeting earlier this month.

The minutes that were released yesterday also showed that the MPC voted 8-1 to cut interest rates to 1% in February from January's 1.5%. 1 member David Blanchflower called for a bigger cut to 0.5%

What does this mean for exchange rates?
I would normally have expected Sterling weakness on the back of this news, as investors flee from the beleagured pound. However, the markets seem to be giving the BoE the benefit of the doubt at the moment, and Sterling has not fallen of a cliff as many expected following the news.

What it does mean, is that the central bank are running out of tools to try and mend the financial problems we currently face.

Here we see the Interest rates for the UK for the last 58 years.

As you can clearly see, rates are the lowest since 1694.
There is little more room for movement, hence the move towards quantative easing.

I do expect further interest rate cuts in the coming months, which will likely weaken the pound further. Therfore if you have a requirement, consider acting sooner rather than later. It was not long ago that the pound was almost at parity with the Euro. We could see this again in the coming months due to the above reasons.

US
In other news, the US Senate has voted in favour of Barack Obama's $787bn (£548bn) economic stimulus plan , clearing the way for it to be signed into law. The vote came hours after the House of Representatives passed the measure without Republican backing.

Mr Obama has said the plan - a package of tax cuts and spending - will "save or create more than 3.5 million jobs". Republicans argue the tax cuts are insufficient, and that the economy will be saddled with debt for years to come. Members of both houses of Congress reached a deal over the content of the stimulus package on Wednesday.

Depending on the results of this plan, GBPUSD rates could be extremely volatile in the coming weeks.
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