Tuesday 25th October 2011
Good morning. There was cautious optimism in the currency markets yesterday, with European leaders expected to hammer out a solution to the debt crisis over the next few days. This helped push Sterling to a 6 week high against the US Dollar, but it fell against the AUD and Euro slightly. Today we'll take a look at how the EU debt summit may affect Sterling exchange rates. At 08:30am this morning rates are as follows:
• GBP/EUR 1.1496
• GBP/USD 1.5985
• GBP/AUD 1.5277
• GBP/NZD 1.9891
• GBP/CHF 1.4095
• GBP/CAD 1.6013
• GBP/ZAR 12.627
• GBP/JPY 121.62
• GBP/DKK 8.5576
• GBP/NOK 8.8346
• EUR/USD 1.3901
Markets steady ahead of EU debt summit
At the summit at the weekend the EU neared an agreement and they came closer to a deal to leverage the euro area's rescue fund. This helped calm the markets slightly. However a final decision was put off until the second meeting tomorrow, and significant differences remain over the size of losses holders of Greek government debt will have to book. It's a volatile time and tomorrows decisions will have a big impact on exchange rates for Sterling against other currencies.
"Sterling does look vulnerable, especially against the dollar in the coming days and months. The UK is exposed to the euro area and markets are trading on hope rather than any concrete action from euro zone policymakers," said Raghav Subbarao, currency strategist at Barclays Capital.
"A lot of the good news has already been priced in, so there is a risk of disappointment in the euro and currencies tightly correlated to the euro. Whatever they announce on Wednesday, it is unlikely to translate immediately into policy."
Most analysts expect Sterling/Euro rates to fall if an agreement is reached, as it will strengthen the Euro and make it more expensive to purchase.
What about the Pound vs other currencies such as the Australian Dollar?
Many investors see a rough ride ahead in coming months after Bank of England policy committee minutes last week hinted that more quantitative easing may be needed to prop up the UK economy. QE involves flooding the market with pounds and increasing the central bank's balance sheet, a move which is usually bearish for the currency.
Due to this, we expect rates to dip against the AUD in the coming weeks, especially as the antipodean currencies gain strength due to a rise in commodities. We said GBP/AUD fall nearly a point during trading yesterday, despite a boost for riskier currencies such as Sterling.
Today's Data
UK Mortgage approvals are released today, in addition to current account data from the ONS. There are consumer confidence figures from Germany. Further afield we have an Interest rate decision in Canada, and Housing Prices and confidence data from the USA.
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