Thursday, 10 February 2011

Effect of Interest Rates on Sterling exchange rates

10th February 2011
Good morning. Despite figures yesterday showing a record high UK deficit, Sterling didn't fall too much, holding firm ahead of today's Interest Rate decision. Earlier this week our Director of Foreign exchange discussed Interest Rates on CNBC. We'll look at this in a moment after the usual snapshot of rates as at 08:30am:
  • GBP/EUR 1.1762
  • GBP/USD 1.6056
  • GBP/AUD 1.5978
  • GBP/NZD 2.0900
  • GBP/CAD 1.6003
  • GBP/CHF 1.5465
  • GBP/ZAR 11.656
  • GBP/JPY 132.74
  • GBP/HUF 320.12
  • EUR/USD 1.3650

Director of Foreign Exchange on CNBC

Earlier in the week our Director of FX discussed Interest Rates on CNBC Markets. You can watch the clip here on YouTube.

Interest Rate Decision Today

At 12:00pm the Bank of England will announce their latest interest rate decision. It's expected rates will yet again be left on hold at 0.5%, however there is a very small chance that they will raise rates to combat rising prices.

It's this speculation of a rate hike that has been strengthening the Pound recently, and there is the chance of a rate hike priced into the current value of Sterling. So, if rates are indeed left on hold we expect Sterling to fall today vs other currencies. Of course in the unlikely event rates are pushed up, the pound will likely gain significantly against other currencies.

The Bank of England is well aware of the economic risks that inflation poses to UK economic growth. A key objective for the governor of the Bank of England, Mervyn King, has been to talk down the value of the pound.

When it comes to re-balancing the economy, a weak pound is attractive as it boosts exports. The production side of the economy which produces most of our exports is now growing faster than anything else however this is not enough to combat the deficit alone. In that sense, a higher pound could threaten the one part of Britain's recovery which is providing growth.

So, the Bank of England is unlikely to raise interest rates as they don’t want a stronger pound to risk the fragile economic recovery. For this reason we expect downside risks for the Pound today. What does this mean? It's more likely to drop than it is to gain. If you need to buy currency consider placing a Stop Loss order to pretect against a fall.

Today's Data

Focus shifts back to the UK today, with Industrial Production and Manufacturing production figures. As these sectors are driving the UK’s economy at the moment, these are very important releases and could cause volatility for Sterling. There is also an interest rate decision, but it’s very likely rates will remain on hold at 0.5%

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