Wednesday, 11 May 2011

BoE Inflation report could affect GBP exchange rates

11th May 2011
Good morning. Exchange rates remained fairly stable yesterday, with little economic data of note being released. Today however we have some key UK data which could change things, which we'll look at in a moment after the usual snapshot of rates as at 08:30am:
  • GBP/EUR 1.1381
  • GBP/USD 1.6359
  • GBP/AUD 1.5069
  • GBP/NZD 2.0604
  • GBP/CAD 1.5641
  • GBP/CHF 1.4404
  • GBP/JPY 132.05
  • GBP/ZAR 11.087
  • GBP/DKK 8.4842
  • GBP/NOK 8.8777
  • EUR/USD 1.4369
Key UK data today that could change exchange rates

The Bank of England today will release its quarterly inflation report. This is likely to forecast higher inflation and they will likely defend their decision to keep interest rates at a record low 0.5 %.

Traders said such a view may push back the chances of a UK rate hike and could weigh on sterling, allowing the euro to regain some lost ground against the pound. Recently it's the fact that EU interest rates are going up before the UK that caused GBP/EUR rates to hit a 13 month lows.

So why is Sterling so weak?

Recent downbeat UK data has painted a picture of a very patchy recovery in the UK, with the economy facing public spending cuts and weak consumer confidence. These facts coupled with other poor economic figures have kept the BoE from raising interest rates despite high inflation.

If the inflation report today is negative, it could see sterling test those lows we saw last week, while any comments from Governor King which are considered neutral for monetary policy could lend some support, although the fomer is more likely.

What do the analysts say?

"The fresh batch of commentary from BoE Governor King will heavily influence future price action for the pound, but currency traders may show a muted reaction to the report should the central bank head retain a neutral tone for monetary policy," said David Song, currency analyst at FXCM.

Other data today

In addition to the BoE report today, we also have trade balance figures which can often cause volatility for Sterling. There are also inflation measures from the EU, so don't expect GBP/EUR rates to remain at €1.1383 by the end of the day.

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