Good morning. The pound rose yesterday against the Euro and US Dollar after Sterling was supported by a rally in the equity markets. At 08:30am rates are as follows:
When equity markets rally, often the pound gains and this is what we saw yesterday. The Bank of England also held interest rates yesterday as expected, but this had little to no impact on the value of Sterling.
The pound fell earlier in the week after there were warnings about the UK's credit rating due to the deficit. This caused the pound to be sold off, weakening the currency. It would seem though that it had been oversold, as later in the week investors bought back the pound, indicating that for the most part, bad news is already priced into the value of Sterling.
Just like the euro, the British pound is heavily dependent on general risk appetite. Investor fear in recent months has focused almost exclusively on the financial stability and an economy and what it could mean for a nation’s (or region’s) currency and assets. For the sterling, the campaign promises from the new government will not fully alleviate investors’ concerns until the extent of the changes are known and the measures are implemented.
Bank of England hold rates
Rates were left at 0.5%, and they have now been that low since March 2009. The bank uses interest rates to control inflation, usually raising rates. This in turn strengthens the currency due to the higher return. It's likely though that rates will remain this low probably until the end of the year.
However, last month a leading economic think tank warned that rates would have to rise to control inflation. The Organisation for Economic Co-operation and Development (OECD) called for the Bank of England to raise the cost of borrowing to 3.5% by the end of 2011.
When rates do start to rise, probably late this year or in early 2011, it will likely provide some support for Sterling and provide a rally in rates. Unfortunately this is some way off.
Eurzone also hold rates
The ECB has held eurozone interest rates at a record low of 1% for the 10th month running, as expected. They also said growth would be uneven, but the comments did little to weaken the Euro due to the fact it's already so weak due to the debt problems in Greece and Spain.
What's next for the pound
Most analysts are now saying that the markets are waiting for the budget on the 22nd of June. We expect a raft of cuts and tax rises to be announced, and if these are more severe than expected, it could cause the pound to drop further.
Lots of data for the UK today that may well cause volatility in GBP/EUR exchange rates. Industrial Production, Manufacturing Production and Producer Price Index data will all be closely watched by the market. In the US we see Retail Sales which will illustrate how confidence consumers are about the economic recovery.
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