Wednesday 20th July 2011
Good morning. Sterling rose against a weaker US Dollar yesterday, but fell against the Euro ahead of today's BoE minutes which could hurt the Pound further. Also buried in the news under the hacking scandal was the fact the IMF have warned on the global economy. Despite the BBC leaping onto the scandal with glee, giving it wall to wall coverage to the detriment of other news stories, markets took note of the IMF's warning. We'll look at all this in a moment after the usual rate snapshot as at 08:30am this morning:
• GBP/EUR 1.1345
• GBP/USD 1.6076
• GBP/AUD 1.4971
• GBP/NZD 1.8786
• GBP/CAD 1.5257
• GBP/ZAR 11.098
• GBP/JPY 126.80
• GBP/DKK 8.4573
• GBP/NOK 8.8700
• EUR/USD 1.4166
Sterling up against US Dollar
A recovery in equities yesterday helped Sterling rise against the US Dollar, as this created sovereign demand for the Pound. This was also helped by a rebound in UK banking stocks, however gains are still limited due to the UK's exposure to the EU debt crisis. Sterling is particularly vunerable against safe haven currencies like the USD and CHF, due to the concerns over the banking sector and our close links with the EU.
Pound down vs the Euro
Despite EU leaders struggling to reach an agreement on the debt crisis, the Pound fell against the Euro due to the interest rate differentials. The EU have raised interest rates twice this year to 1.5%, while in the UK our rates remain low at 0.5%. The better return on offer for Euros mean Sterling is struggling against the single currency, despite all the problems with EU debt.
BoE Minutes today - Sterling to fall against Euro?
Minutes of the Bank of England's July meeting are expected to add to the view that interest rates will stay chained at a record low 0.5%, and this could hurt the Pound today. Short-term interest rate markets do not price in another UK rate rise until late 2012 and concerns are growing that policymakers may edge towards considering further quantitative easing.
"At the moment there are few reasons to buy the pound apart from medium-term valuation concerns, and the many reasons to sell the pound still exist: low yield, the full effects of austerity yet to be felt and non-existent consumer activity," Commerzbank analysts said in a note.
If they mention further Quantitative Easing, expect Sterling to fall against other currencies. If however the minutes suggest that they are unwilling to pursue further QE, then we may see GBP/EUR rise back towards the €1.15 we saw recently.
Today's Data
Today we see the minutes to the recent BoE decision to hold interest rates. Any talk of Quantitative easing in the notes may cause Sterling to fall. Germany has some inflation numbers today, and the EU releases consumer confidence measures, which are unlikely to be good in light of the debt problems.
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Labels: BoE Minutes, IMF, Interest Rates