Thursday, 3 February 2011

Sterling gains against Euro & USD on Construction Data

3rd February 2011
Good morning. Sterling is slightly higher this morning, again boosted by expectations of an interest rate hike. The good economic figures from the UK of late now seem to be fully priced into the market, and at 08:30am this morning, exchange rates are as follows:

  • GBP/EUR 1.1757
  • GBP/USD 1.6221
  • GBP/AUD 1.5994
  • GBP/NZD 2.0968
  • GBP/CAD 1.6007
  • GBP/CHF 1.5272
  • GBP/ZAR 11.607
  • GBP/JPY 132.31
  • GBP/HUF 315.18
  • GBP/NOK 9.2799
  • EUR/USD 1.3795

So what has caused the Pound to gain against the Euro/US Dollar?

The pound has been boosted by a warning from Bank of England monetary policy committee member Andrew Sentance against delaying raising interest rates to tackle inflation. Bank of England deputy governor Charles Bean was also quoted as saying the Bank may have no choice but to increase rates if commodity prices rise further.

As we outlined in yesterdays report, higher interest rates strengthens the Pound, and the currency markets are pricing in this interest rate expectation into the value of Sterling.

"The case for a rate hike is becoming more compelling and sterling is benefiting on the back of that," said Audrey Childe-Freeman, EMEA head of currency strategy at JP Morgan Private Bank.

Construction Data also helping Sterling

The pound has also due to better construction data. Against the US Dollar the pound has risen to its highest level in three months, buoyed by a return to growth in the construction sector in January.

CIBC currency strategist Jermemy Stretch said the bigger-than-expected rebound in construction "plays into the hands of the rate hike story". The rise in the pound, however, will not be welcomed by exporters as it makes their goods more expensive for foreign buyers.

The construction data follows similar positive news from the manufacturing sector on Tuesday, which showed that UK manufacturing in January expanded at its fastest pace since records began in 1992. These combined has helped push the Pound higher.

Today's Data

Retail Sales are released for Germany and Europe today. It’s a good barometer of consumer confidence, and so we may see volatility in GBP/EUR rates today. The US has some jobless figures at lunchtime, which may weaken the US further if more than 4m people are claiming.

Summary

Going forwards analysts now think these figures are priced into exchange rates. Given the fragile UK recovery and some figures suggesting the economy may head back into recession, we think these gains may be limited.

In recent months gains like these have proved to be short lived, as focus returns to a shrinking economy and austerity measure that have still to be felt. For this reason, if you need to buy currency with Sterling, contact us to discuss our contract types such as Stop Loss orders.

This allows you to place a lower limit where your currency will be bought should rates start to fall. In this way you can still take advantage of any gains in the rate, but still be protected against a downturn and have a worst case scenario of what your currency will cost.

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