Interest Rates and Exchange Rates

Sterling edged down against the euro on Monday, erasing earlier gains made after data showed Britain’s services sector grew more strongly than expected. The pound remained pressured on expectations monetary policy would stay loose for some time, with no change foreseen at a Bank of England policy meeting later this week.

Last night Australia surprised the markets by raising interest rates by 0.25% to 3.25%. This was not expected, and AUD has strengthened and GBP/AUD rates have fallen as a result. Rates at 08:30am stand as follows:

  • GBP/EUR 1.0874
  • GBP/USD 1.6019
  • GBP/AUD 1.8061
  • GBP/NZD 2.1807
  • GBP/CAD 1.7087
  • GBP/CHF 1.6440
  • GBP/JPY 142.89
  • GBP/ZAR 11.966

This suprise move in Australian interest rates is a worry, as it may mean other countries are now recovered enough to do this. It’s likely other zones such as the EU and USA will also raise rates before we do in the UK, and this will keep the pound weak, and exchange rates low.

Last week saw Sterling rise against the Euro, ending 0.65% up, just above the 1.09 level, as there was a jump in sentiment regarding the UK economy and European finance officials voiced some concern about the recent strength of the continental currency. Yet, traders still voiced concern over the medium term outlook for the pound, and the currency pared its gains by the beginning of Monday morning trading.

Unexpected strong UK retail sales data for September gave some upward pressure, added to investors buying back into Sterling after taking their profits from its recent decline. Weak Euro-zone inflation figures in the year to August and unemployment figures showing that the percentage of jobless had hit a ten-year-high of 9.6% had a further positive impact on the pound.

The euro also lost ground due to comments from European Central Bank President Jean-Claude Trichet, who reiterated the view that European officials have been concerned that the strength of the currency will stem the regions recovery, as the export sector may be weakened. The head of the ECB mentioned that currency movements ‘have adverse implications’ and would be on topic at the weekends’ G7 meeting.

However, at the G7 meeting ministers stopped short of directly criticizing the strength of the euro and the weakness of other major currencies, which gave investors more confidence in the currency and caused Sterling to fall over the weekend. Expectations that the Bank of England would hold rates at a low for longer than other central banks also weighed on the pound.

The coming week sees interest rate decisions for both the BoE and the ECB. The Euro’s prospects are likely to be driven by any comments about its strength from European Central Bank President Jean-Claude Trichet following the interest-rate meeting.

The BoE is expected to maintain its current stance on asset purchases and keep interest rates at a record low, with the European Central Bank expected to keep rates on hold but may make further talk on exiting its loose monetary policy. This could cause further Sterling weakness, so contact your account executive early to discuss the possibilities of locking in current rates before the market prices in these future movements.

Today we have the following data, the most important being the GDP estimate and consumer confidence data for the UK.

Aus – Interest Rate Decision (Raised to 0.25%)
UK – Industrial Production
UK – Manufacturing Production
US – Consumer Confidence
UK – Nationwide Consumer Confidence
UK – GDP Estimate

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