Exchange Rates & Interest Rates (ECB/BoE)

8th April 2011
Good morning. Interest rates happened as expected yesterday, with the Bank of England leaving rates on hold and the European Central Bank raising by 0.25%. As this was forecast it had surprisingly little effect on exchange rates. We'll look at this in detail after the usual snapshot of rates as at 08:30am:
Interest Rates in the UK and EU

Sterling rose very slightly against the Euro yesterday after the European Central Bank signalled a euro zone interest rate rise earlier in the day was not necessarily the first in a series.

The Bank of England left its key interest rate on hold at 0.5%. The pound, however, was supported versus the euro as many in the market had been looking for ECB President Jean-Claude Trichet, at an ECB news conference, to indicate that more euro zone rate rises were in store. He didn't, which means yesterdays rise may be a one off rather than the start of a series of hikes.

Analysts and traders said the Euro may have room for more gains versus the pound because a weak UK economy could leave the BoE's Monetary Policy Committee (MPC) little scope to raise rates, despite UK inflation running well above target.

"We will see buyers of dips in the euro and we will see the euro appreciate because I think the market will come to the mindset that the ECB are more likely to hike again and they probably will in a couple of months' time," said Richard Wiltshire, chief FX broker at ETX Capital.

"But the MPC will have to sit on their hands as long as possible and do nothing until their hand is forced."

Even though UK rates were left on hold, the pound did fall slightly as some in the markets had expected a small chance of a rate hike.

Summary

For those that need to buy Euros, it's hard to see where any gains will come from in the short to medium term. The only thing that's likely to push GBP/EUR rates higher is a rate hike which isn't likely to come until at least August.

The Euro bailout of Portugal could weaken the Euro a little, but is unlikely as Portugal is such a small economy. Spain is unlikely to be affected so we expect rates to remain low for the time being.

Today's Data

We end the week with German Trade balance figures, and as the largest economy in the EU this could affect the value of the Euro. There are also further inflation measures for the UK and unemployment figures from Canada released today.

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