Thursday, 9 October 2014

Pound at risk as Euro crisis weighs on UK

Thursday 9th September 2014
After falling earlier this week, GBP/EUR rates recovered slightly yesterday due to a weaker Euro. Let’s first look at why rates fell. It’s all to do with inflation, and the impact this has on when the Bank of England (BoE) will raise interest rates.  As regular readers will know, the speculation on interest rates going up has been the driver behind the Pound’s appreciation this year, as higher rates strengthen a currency due to the better return on offer for investors.

However inflation in the UK is now e
asing which could allow the central bank to keep interest rates low. This is what has cause the Pound to drop away this week. Indeed yesterday the BoE’s Monetary Policy Committee (MPC) decided again to hold UK interest rates at a record low of 0.5% which was not a surprise. Nor was their decision not to extend its quantitative easing programme beyond the £375bn already spent. In two weeks, the Bank will reveal how members of its rate-setting committee voted on the rates decision. Last month, two members voted for a rise.

Yesterday afternoon the European Central Bank’s (ECB) president Mario Draghi gave a speech which you can read in full here. There was nothing new in his comments however, and due to this there was little to no market reaction. 


Will Pound/Euro rates go up or down?


It is of course impossible to predict market movements, but looking at the pattern over the last few months, Euro buyers should give serious consideration to fixing rates while they are still close to a 6 year high. There is nothing to suggest rates will break higher given they have failed to do so for many months. Supporting this view is Peter Kinsella, currency strategist at Commerzbank who said yesterday that "A lot of the good news has already been priced into the pound," indicating many analysts think the Pound has run as high as it can. Chancellor Osborne also warned yesterday that Britain’s recovery is at risk from a new EU recession.

FED Comments weaken US Dollar


GBP/USD rates have dropped from $1.72 to below $1.60 in recent months; however this week has clawed back some losses as the chart below shows, settling comfortably above the $1.62 market. The pound had surged more than 15 percent against the dollar in the year to mid-July on expectations the BoE would raise interest rates before its peers in the United States and Europe.
But it has fallen almost 7 % in the last three months as expectations of a rate hike by the end of 2014 faded.

The latest nonfarm payrolls released last Friday had led me to believe the Fed might hike interest rates sooner rather than later, however recent FED minutes this week quashed any chance of that, and suggested the central bank was in no such hurry. This weakened the USD slightly pushing rates higher.


 

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