Pound remains at €1.19 vs Euro, near 8 month high

Tuesday 17th September 2013 
Good afternoon. Sterling remains strong, however has failed to rise significantly above the €1.19 level against the Euro. GBP/EUR rates remain around the best since January. The Pound has however hit an 8 month high against the US Dollar after Lawrence Summers, perceived by the market as more likely to favour a quick scaling back of monetary stimulus, pulled out from the race to be the next Fed chief. So in today’s report: 

UK inflation drops weakening Pound 

Figures this morning showed a slight fall in inflation, which has pulled the Pound lower. Inflation measured by the consumer prices index (CPI) fell to 2.7% in the year to August, from 2.8% in July. 

CPI is important because it is the measure targeted by the Bank of England's interest rate-setters, while the RPI is used for annual adjustments in some benefits and rail fares. The Bank targets CPI inflation of 2%, but is currently holding off raising interest rates to control inflation because the unemployment rate is too high. 

A high figure usually strengthens the Pound, and because the number was slightly lower than expected the Pound weakened slightly, pulling down exchange rates. 

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German Economic figures better than expected, weakening Euro. 

 Also pulling GBP/EUR rates down was better than expected numbers from Germany. Economic sentiment is better than analysts had been predicting, and so this gave the Euro strength, making it more expensive. As a result we have seen GBP/EUR rates fall slightly. 

Pound/Euro remains at a good level 

As you can see from the chart, the Pound/Euro rate remains close to the best it’s been since January. It’s been at this level for a week or two now, and for a few days it rose above the €1.19 level, however the figures mentioned above have pulled it back to €1.19 again. 

This is a very good buying level, but seems to have levelled off and we haven’t seen any significant gains. The main thing that I think will move the rates next will be tomorrow’s minutes from the Bank of England, and UK Retail Sales on Thursday. 

Tomorrow the BoE will release its minutes, showing how the members voted at their recent decision to keep interest rates and QE on hold. They will be interesting because it will show what was discussed, and could indicate future decisions on QE and interest rates. If there are any indications any of the members wanted more QE, we may see the Pound fall. 

Retail Sales on Thursday are important as they are a good barometer of overall economic activity. I expect the figures to show a month on month gain of 0.5%. If the actual figure is higher than this, then expect exchange rates to rise. If the number is lower, then we will probably see the Pound fall in value. 

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US Fed member drops out of race to be FED chief, weakening US Dollar 

The Pound rose to an 8 month high against the US Dollar earlier this week, after Lawrence Summers, perceived by the market as more likely to favour a quick scaling back of monetary stimulus, pulled out from the race to be the next Fed chief. The dollar fell broadly as it means it will probably be Janet Yellen that takes over the next chair of the Federal Reserve - she is expected to rapidly reduce U.S. bond-buying. This meant the US Dollar weakened, became cheaper to purchase, and GBP/USD rates rose. 

Due to the poor inflation numbers today however, we’ve seen the rate drop back away. 

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