UK Interest Rates
The Bank of England yesterday left interest rates on hold for the 27th month in a row. This is due to stagnant growth. Most analysts now don't expect interest rates to go up until well into 2012, and as such Sterling is likely to remain weak.
Higher interest rates strengthen a currency due to the higher return attracting investors to the currency. As rates are at a record low and likely to remain so for quite some time, Sterling will remain weak.
EU Interest Rates
The ECB also left interest rates on hold, however in the press conference afterwards they indicated rates would go up in July. This was also expected, and as investors booked profits on the Euro it caused GBP/EUR rates to rise slightly.
It was also signalled that further rate rises would come in the EU, but perhaps not as fast as some analysts were expecting. This paring back of future rate hike expectations also helped slightly to push GBP/EUR higher.
So what does this mean for exchange rates?
As outlined above, higher rates in the Eurozone will attract investors to the single currency. This is likely to cause strength in the coming months and make the Euro more expensive to purchase. So we expect GBP/EUR could drop in the coming months as we get closer to a rate hike in the EU.
Labels: Interest Rates