Thursday, 12 May 2011

Sterling hits 6 week high vs Euro on BoE Inflation report

12 May 2011
Good morning. What a difference a week makes... This time last Thursday GBP/EUR rates were at a 13 month low of €1.1050, but with yesterdays bullish inflation report from the Bank of England, rates have climbed significantly, as you can see in the daily rate snapshot:
  • GBP/EUR 1.1477
  • GBP/USD 1.6328
  • GBP/AUD 1.5360
  • GBP/NZD 2.0699
  • GBP/CAD 1.5739
  • GBP/CHF 1.4470
  • GBP/ZAR 11.248
  • GBP/JPY 132.35
  • GBP/NOK 8.946
  • GBP/DKK 8.555
  • EUR/USD 1.4225
Pound hits 6 week high vs Euro on BoE inflation report

Sterling climbed to a 6 week high against the Euro yesterday, after the Bank of England raised its inflation forecasts. This led markets to bring forward the possible timing of an interest rate hike, and as a result Sterling surged against other currencies.

Some analysts have said that with weakness in the Euro also caused by EU debt fears, rates could continue to climb higher. However, others said the pound's rally could reverse as it has not fully priced in lowered interest rate expectations, with sterling also vulnerable to further gloomy news about UK growth.

"The market was positioned quite short going into it, expecting a more dovish tone from the BoE, and that's the main reason sterling rallied, but I wouldn't want to chase that rally much higher," said Chris Walker, currency strategist at UBS.

The reason some think the pound could fall is that the BoE also downgraded its near-term outlook for growth since its last report in February, adding that first-quarter growth had been slower than predicted.

Other data yesterday supported views of sluggish UK economic growth, showing Britain's goods trade deficit widened more than expected in March, giving back some of the strong improvement seen in the first two months, limiting the pounds gains.

Summary

Despite the increase in rates of nearly 5 points in as many days, the near term future for Sterling is uncertain to say the least. It could go higher if there are more problems in the Eurozone, but the underlying facts in the inflation report are actually negative for the economy, and this could pull the pound back down.

For those that need to buy Euros, it could be wise to consider taking advantage of the best rates in 6 weeks. Likewise for those selling Euros, despite rates moving the wrong way, it's still not too far from the best in over a year, and with uncertainty over interest rates in the UK and EU coupled with debt fears in the Eurozone, it could move either way in the coming weeks.

Contact us today to discuss how to protect against adverse rate movements, whichever currency you need to buy or sell. Don't just leave it and hope things will move your way; leaving things to chance is not a reliable economic tool.

If you need to buy or sell foreign currency, click below now to send us an enquiry for free. Our exchange rates are up to 5% better than offered by banks. Take the first step to making the most of your currency now.