14th January 2011
Good morning. Nothing lasts forever, and the rise of Sterling vs the Euro is no exception. After hitting 4 month highs at the start of the week, as we correctly predicted rates have now fallen sharply away due to a stronger Euro, despite hitting a 1 month high vs the US Dollar.
Today we'll look at why the pound has fallen against the Euro. First, rates at 08:30am this morning are as follows:
- GBP/EUR 1.1782
- GBP/USD 1.5840
- GBP/AUD 1.5884
- GBP/NZD 2.0584
- GBP/CAD 1.5737
- GBP/ZAR 10.805
- GBP/JPY 130.52
- GBP/DKK 8.7744
- GBP/SEK 10.5649
Pound falls vs Euro
Yesterday there were further bond auctions in the Eurozone following Portugal's successful raising of finance earlier in the week. The fact that they were easily able to raise finance on the bond markets signals renewed confidence in the Euro, and it became stronger throughout the day.
Also strengthening the Euro was the comments by European Central Bank (ECB) president Jean Claude Trichet saying that they would have no problem raising interest rates to combat price inflation. Higher rates represent a higher return for investors, and so this also spurred investment to the Euro creating demand that strengthened the single currency.
Rates have now fallen from a 4 month high of €1.2060 to the €1.17's today. As markets are low less wary of the Euro, the recent decline in it's value is being reversed. Those that took heed of our warnings of a possible fall and placed Stop Loss orders have protected themselves against this decline in rates.
Will the pound go back up against the Euro?
Moving forwards, many analysts do expect the Pound to get stronger, and this is resulted in the gains against the US Dollar. Some think though that the Euro is undervalued, and so there could be further declines in GBP/EUR rates, especially if we get negative UK data.
Pound up against US DollarSterling rose to a 1 month high against the USD yesterday, helped by speculation UK interest rates may rise sooner than expected and on weaker U.S. data.
The Bank of England kept rates at a record low of 0.5 % as expected yesterday, but many expect that consistently high inflation may pressure the central bank into raising rates.
"Sterling is being dragged up against the dollar on the back of a stronger euro after hawkish comments from Trichet and a positive auction result," said Neil Mellor, currency strategist at Bank of New York Mellon. "There are quite a few opinions in the market on the BoE and the focus has definitely shifted to inflation and away from deflation risks," he added.
UK Interest Rates
While some in the market are speculating about an earlier-than-expected rate rise, others warn such a move would be damaging to the UK's fragile recovery, coming just as the harsh effects of the government's austerity measures are felt.
"Higher inflation is effectively a tax if it's not reflected in higher wages. We don't believe a rate rise is going to happen soon," said Adrian Schmidt, currency analyst at Lloyds Banking Group, who said rising UK yields had boosted sterling over recent weeks.
So clearly there are differing views and no consensus on interest rate movements. This will be reflected in Sterling's performance, as if it's unclear which way rates will go, it's therefore unclear which direction Sterling will take in the coming months.
If you need to buy or sell foreign currency, open an account with us today. It's free to do, doesn't obligate you at all, and simply gives you access to our market knowledge and commercial exchange rates.
To end the week we some UK & German inflation figures which could impact future interest rate movements. However as analysts are unclear which way rates will move, this could cause further volatility with GBP/EUR rates.
We do expect further fall out also from the EU bond auctions which has strengthened the Euro.
Have a great weekend.