Earlier this week, the GBPEUR rate hit a 6 month high of 1.1650, based on renewed confidence in Sterling, and also US Dollar weakness causing further buying of the pound, which pushed the currency higher. This has proved to be very short lived however, as the pound plummeted dramatically in trading early yesterday afternoon. First we’ll take a look at the main economic data yesterday, the interest rate announcements. Then we’ll take a look at why the pound has fallen so much.
BoE and ECB rate decision.
As expected by analysts, both the UK and EU left their interest rates on hold at 0.5% and 1.0% respectively. I did go out on a limb and predict the EU may cut, however they did indeed left rates unchanged for the time being. We now look for an EU cut next month.
As discussed yesterday, the main focus was not on the actual rate movements, but rather whether either zone would extend their quantitative easing programmes, and create new money to pump into the economy. This didn’t happen, and so for a while after the decisions, there was no movement at all in exchange rates. Analysts now expect the BoE to increase the QE measures next month, which will likely weigh on the pound.
So, why did GBP drop so quickly and so suddenly?
Simple answer is the political situation in the UK. Soon after the interest rate decisions, focus shifted to politics as the pound fell sharply on speculation British Prime Minister Gordon Brown would resign, which was quickly dismissed by his office as “absolute nonsense.”
Markets seized on the speculation and it was this that took the pound lower, cashing in on the pound’s lofty levels as broad-based dollar selling lost momentum.
Politics and the expenses scandal has been all over the front pages for a month now, but up until yesterday this has had little effect on the markets. now however, with yet another minister (Purnell) resinging from the cabinet, it would appear the goeverment is in meltdown. Early polls suggest Labour have been demolished in the local elections, with the conservatives now way ahead. It is more likely than ever now that Brown will have to step aside, and a General Election is getting more likely by the day.
“The market is waking up to what a mess politics are in the UK and that is causing sterling to underperform,” RBC currency strategist Adam Cole said.
“Earlier in the week the uncertain political situation in the UK had no effect on the pound, but now people are talking about it as a sterling negative,” said Brown Brothers Harriman currency strategist Audrey Childe-Freeman.
GBPEUR at the time of writing is back in the 1.12’s, with USD rates just above $1.60. As I often say in this blog, spikes are often short lived, and that yet again has proved to be the case.
When should I buy my currency?
There are really 2 times that are the best times to fix your rate. The absolute best time, is when the rate is at its peak. Of course, achieving this is purely luck, as nobody knows where that peak is until it has already passed.
So, the second best time to buy your currency, is just after a peak. This is where we were yesterday, and clients that had an account open, were able to take advantage of this strategy
and protect themselves. Make sure you have a live account, so you can act quickly should you need to. Click the orange banner below to register for free.
As you will see below, there is further data today, and of course political developments over the weekend are also likely to weigh heavy on Sterling.
we have Produce Price Index data at 09:30, which is a monthly measurement of the rate of inflation experienced by the UK manufactures when buying goods and services. It captures changes in the average price of a fixed basket of goods and services purchased by the UK Manufactures. It often causes changes in the pounds value.
Today is mostly US based data. As I outlined earlier in the week though, changes in value of the US Dollar can have a direct effect on Sterlings value, so needs to be taken in to account.
At 13:30 we have earnings and unemployment data. Most important though, is the Non-Farm Payrolls which is one of the most important data releases. The report presents the number of people on the payrolls of all non-agricultural businesses.
The monthly changes in payrolls can be excessively volatile. As its so hard to predict, the forecasts are rarely correct. Expect figure is -521k so any variation from this and we can expect some rate movements.
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