Wednesday, 15 June 2011

Pound vs Euro will the rate go up?

15th June 2011
Good morning. UK inflation figures yesterday offered little reason to believe the Bank of England will raise interest rates any time soon, and as a result Sterling fell slightly and struggled vs other currencies. At 08:30am this morning rates are as follows:



  • GBP/EUR 1.1385

  • GBP/USD 1.6351

  • GBP/AUD 1.5286

  • GBP/NZD 2.0066

  • GBP/CAD 1.5814

  • GBP/ZAR 11.074

  • GBP/JPY 131.78

  • GBP/DKK 8.4933

  • GBP/NOK 8.8843

  • EUR/USD 1.4355

UK Inflation / Interest Rates


Inflation rose to 4.5% yesterday, in line with analysts expectations. Despite this being well above the governments target of 2%, it's unlikely the Bank of England will raise interest rates to combat this due to the effect it would have on the economic recovery.


The BoE has repeatedly warned that inflation could get as high as 5% before retreating, and the fact interest rates will stay low despite this is keeping the Pound weak.


With other central banks such as the EU expected to raise interest rates several times this year, the differential is likely to keep GBP/EUR rates low.


Sterling has risen slightly this morning however, as investors look to buy Sterling before the Retail Sales figures today. Also the EU finance meeting is casting doubt on the ability of Greece to repay it's debts, and this has weakened the Euro slightly.


What do the analysts say?

"I wouldn't want to buy sterling after the data," said Chris Walker, currency strategist at UBS. It doesn't change expectations that rates will stay low for the next six months, at least."

Other analysts said stubborn inflation was harmful to the broader economy, which has suffered as the UK grapples with strict fiscal austerity measures, and many see downward risks to the pound.

"High UK inflation remains a risk to growth, both via a squeeze on real consumers incomes and by limiting the BoE's ability to ease policy further in response to the fiscal drag from spending cuts in the next year," BBH analysts said.

Summary

Quite simply, it's expected Sterling will remain weak against other currencies for some time to come. Today we have some jobs data from the UK that could hurt the Pound even more, and Retail Sales figures tomorrow will also be closely watched.

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