Wednesday 3rd October 2012
Good afternoon everybody. I'm taking a few minutes to give an update on what has been happening so far this week int he currency markets. The Pound has not fared very well so far this week, and
exchange rates to buy US Dollars have dropped to a 3 week low, while against
the single currency, GBP/EUR rates have dropped to the lowest in 2 weeks.
Why has the Pound fallen against the Euro?
The reason for the decline is mainly due to UK data,
rather than events in the Eurozone. Poor economic data releases this week have
dented confidence in the recovery in the UK economy, and Sterling has weakened
as a result.
For example, so far this week we have seen poor inflation
numbers, figures confirming we are still in recession, lower than expected
manufacturing data, and also today a showing Britain's service sector growth
slowed in September and also other services providers shed jobs for the first
time in 10 months.
In recent times it has been the EU debt crisis driving exchange
rates, with fears over Spain and Portugal weakening the Euro. This trend now
seems to be moving the other way, and GBP/EUR rates have now dropped below
€1.25 as you can see from the chart below.
Central Bank meetings on Thursday
The next important event for the currency markets will be
the central bank meetings for both the Bank of England (BoE) and European
Central Bank (ECB). They will make announcements tomorrow with regards to
interest rates, and also if the UK Quantitative Easing (QE) programme will be
increased.
The UK will announce first at 12:00pm, and I don’t expect any change to rates
or QE. Most in the market hold the same view, and we expect further QE in
November. So if indeed there are no surprises, then there is not likely to be
any impact on rates. If they do announce any QE, expect the Pound to fall.
At 12:45pm the ECB will make their announcement, and
again I don’t expect any movement in their interest rate of 0.75%. Of more importance
will be the press conference that follows at 13:30pm, as if the ECB president
Mario Draghi makes any comments that the market perceives as positive or
negative, then we could see movement in the GBP/EUR rate. In a recent meeting,
he announced they will do ‘whatever it takes’ to save the Euro, and this simple
comment caused the Pound/Euro rate to drop significantly in just a few seconds,
highlighting how this press conference could affect rates.
Pound/Aussie Dollar rate climbs
There was a surprise cut to the Australian Interest rate
earlier this week, and as a result the Aussie Dollar weakened and became
cheaper to buy. Due to the lower return now on offer, investors sold the
Aussie, and this has helped push rates up significantly, as the graph below
shows. With more QE likely in November for the UK that could weaken the Pound,
if you need to buy Australian Dollars it would be wise to consider your options
now.
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Labels: Interest Rates, Pound/Aussie, Pound/Dollar, Pound/Euro, Quantitatve Easing, UK Economy
