Interest Rate expectations hurt the pound

The pound continued to fall throughout trading yesterday, after government bond yeilds fell, and also interest rate differentials caused the Euro to gain against the pound. Rates at 08:30am 27th August are as follows:

  • GBP/EUR 1.1369
  • GBP/USD 1.6210
  • GBP/AUD 1.9542
  • GBP/NZD 2.3814
  • GBP/CAD 1.7805
  • GBP/CHF 1.7305
  • GBP/ZAR 12.706
  • GBP/JPY 151.61

The pounds continued weakness
Sterling hit a near 3 month low against the Euro yesterday after the yield on 2 year UK government bonds fell to a record low. This makes short-dated British debt less attractive than its euro zone counterpart.

Also, lower short-term UK yields hurt the pound across the board, pushing it to a 6 week low against the US Dollar. We also saw a strong reading of German Ifo business sentiment, and this boosted the euro against sterling, compounding the problem and causing rates to fall into the mid 1.13’s.

“When the BoE is so cautious about keeping rates low and the Ifo is so positive, it’s hard not to push Pound Euro rates lower,” said Geoffrey Yu, currency strategist at UBS in London.

Analysts said the widening spread had prompted investors to pull out of UK assets in favour of euro zone ones in European trade. As investors sell Sterling and buy Euros, it increases the value of the Euro and rates fall. Also, month end demand for euros from European central banks also helped to boost the single currency. As demand increases for anything, be it currency, eggs, cars or bread then the price increases.

Interest rate spreads are widening against those in the euro zone, as investors forsee rates in the Eurozone climbing before ours, then they move funds to Euros in anticipation of a higher returm. Investors have scaled back expectations on how aggressively the BoE will raise rates over the coming year. This has caused the rates to fall.

We seem to be hitting support levels at around the mid to low 1.13’s, and so the fall is probably over, and rates should either stabilise or rise slightly. of course, we have quite a bit of data for the UK today (see below) – if any of this is negative then dont rule out a further fall, although given 4 consecutive days of drops for the pound, we’re due a spike!

German Condidence Strengthens Euro
The business sentiment indicator from the Ifo Institute rose to 90.5 in August from a revised 87.4 in July. The unexpectedly strong rise was the fifth consecutive monthly increase, taking the figure to its highest since September 2008. The euro rose to 87.82 pence, which was up 0.43% on the day. The short to medium term outlook for GBP/EUR therefore is very poor.

US Consumer Confidence Climbs
US consumer confidence rose more than expected this month, a report has found, in the latest sign that the economy may now be recovering. The closely-watched Consumer Confidence Index from the Conference Board business organisation rose to 54.1 from a revised 47.4 in July.
While the latest number beat market expectations, it is still below 90, the minimum to indicate a healthy economy. Rates for USD remain at around 1.62 at the time of writing.

Todays Data
Ger – Consumer Price Index
UK – Nationwide House Prices
UK – Total Business Investment
UK – CBI Trade Survey
UK – GFK Consumer Confidence
US – Gross Domestic Product
US – Personal Consumption Expenditure
US – Jobless Claims
NZ – Building Permits
Jap – Consumer Price Index
Jap – Consumer Spending

When you get in touch, ensure you mention you heard about foremost currency group through our Blog. Simply quote ‘Blog’

Open a free Trading Facility

Open an online Trading Account

Email Me

Foremost Currency Group

Leave a Reply

Your email address will not be published. Required fields are marked *