Interest Rates, Quantitative Easing & Exchange Rates

Good Morning. It was a year ago this week, that the financial crisis really took hold, with bank bailouts and emergency world interest rate cuts. This started a big decline in Sterling exchange rates, as it became clear the global economic situation, and the UK’s in particuler, was much worse than thought.

Crisis Timeline 2008
7 SEPT: Fannie Mae nationalised
15 SEPT: Lehman bankruptcy
18 SEPT: Lloyds takes over HBOS
19 SEPT: $700bn US bail-out plan
29 SEPT: Bradford and Bingley nationalised
5 OCT: Bail-out plan agreed by Congress
12 OCT: UK bails out RBS and Lloyds-HBOS

It was during these months that we saw huge swings on exchange rates, demonstrating how quickly and unpredictably the currency markets can move. The UK faces years of damage to their public spending plans as the rescue and the economic collapse has led to huge government deficits. Each UK household is on average £40,000 worse off – it is for these reasons that the pound is so weak in comparison to other world currencies, and is likely to remain so for some time.

We had some good UK financial news last week however, which has caused rates to climb after more than a week of steady declines. At the time of writing, rates are as follows:

  • GBP/EUR 1.1443
  • GBP/USD 1.6419
  • GBP/AUD 1.9201
  • GBP/NZD 2.3690
  • GBP/ZAR 12.497
  • GBP/JPY 152.98
  • GBP/CAD 1.7732

UK Interest Rates & Quantitative Easing
This week we see an interest rate annoucnement by the Bank of England, and markets will be focusing on whether the Bank of England will stick to its loose monetary policy.

The BoE is widely seen keeping interest rates unchanged at a record low 0.5% leaving investor focus on whether it will stick to its ultra loose monetary policy going forward.

We still feel that the quantitative easing process from the Bank of England is at the start of a winding down process, and the monthly amount of QE the BoE is doing is beginning to diminish and we think it will continue to do so that negative sterling is at least starting to disappear.

However, remember last month when analysts thought the same, but in fact the Bank annoucned a further £25bn in ‘new money’ and when the minutes to the meeting were released, it showed that 3 members, including the Governor Mervyn King actually wanted double that, so markets will watch nervously for any further announcements this week.

This Weeks Data
Lots of data this week, that will no doubt cause big swings in what has been a very volatile currency market of late. Interest Rate decisions will feature heavily, as we see announcements by the Bank of England, Reserve Bank of New Zealand, and also Canada. For the UK, we expect rates to be left on hold at a record low of 0.5%, which has helped keep the pound low in recent months. However, in recent months the bank has surprised the markets in announcing further Quantitative Easing measures which have weakened the pound. Watch the decion and comments closely as GBP rates will likely be affected.

Also for the UK, we’ll see Industrial & Manufacturing production data, which are both short term indicators of the strength of UK activity that dominates a large part of total GDP. We have a GDP estimate for the UK on Wednesday, that comes out a month before the official announcement. The report is highly reliable and would influence the UK monetary policy.

For the EU Investor Confidence, and an ECB monthly report that contains a detailed analysis of the prevailing economic situation and the risks to price stability. It also provides articles on a wide range of topics related to the tasks of the ECB. A high reading anticipates a hawkish attitude which will be positive, or bullish, for the EUR, while a low reading is seen as negative, or bearish.

As always, should you have any questions about how any of the below releases could affect exchange rates for your requirments, get in touch today for a free consultation.

Monday
Ger – Factory Orders
UK – RICS House Price Balance
Jap – Trade Balance

Tuesday
Aus – NAB Business Confidence
Swi – Unemployment
Ger – Trade Balance
UK – Halifax House Prices
UK – Industrial Production
UK – Manufacturing Production
UK – Nationwide Consumer Confidence
Ger – Industrial Production
US – Consumer Credit

Wednesday
Aus – Home Loans
US – Investment Lending
Ger – Consumer Price Index
UK – Trade Balance
UK – BRC Shop Price Index
UK – Mortgage Applications
NZ – RBNZ Interest Rate Decision
UK – GDP Estimate

Thursday
Aus – Inflation
US – Jobless Claims
US – Trade Balance
Can – Interest Rate Decision
NZ – Food Price Index
UK – Interest Rate Decicion

Friday
Jap – Consumer Confidence
EU – ECB Monthly Report
UK – Producer Price Index
US – Import Prices
US – Consumer Sentiment
Can – House Price Index

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