Tuesday 15th July 2015
Good morning. The Pound has surged higher this morning after figures showed that the rate of UK inflation rose sharply in June. The numbers were more than the market had forecast, and the inflation rate is now close to the Bank of England's 2% target. As you can see from this morning’s GBP/EUR graph, this caused rates to rise from 1.2530 up to 1.26 where it has levelled off.
Why did inflation numbers cause the Pound to rise?
As regular readers will know, it’s to do with interest rates. In fact that’s the reason behind the Pound’s gains in the last few months. The high inflation figures mean there is now more chance of a rise in UK interest rates, which have been held at a record low of 0.5% for a long time.
"The news will further fuel expectations that the Bank of England will start raising interest rates sooner rather than later, with November looking the most likely month for the first hike," said Chris Williamson, chief economist at research firm Markit.
Why do higher interest rates strengthen a currency?
Investors get more return, so the rumour of rates going up means international investors buy the Pound causing it to gain strength, and this pushes exchange rates up.
Pound/Euro now back close to 2 year high
The current level is very attractive indeed; however rates have reached this level several times without managing to break higher. Recent trends show that when the rate gets to this level, it drops back away again.
Of course there is no way to know if this will happen again, but those with a Euro requirement should consider taking advantage of the rate while it’s so good.
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Labels: Best Exchange Rates, Currency, Interest Rates, Pound/Euro, UK Inflation