Pound remains weak, eyes now on BoE tomorrow

Good Morning. Sterling hit a 5 month low against a basket of major currencies yesterday, and a new 1 week low against the Euro after an unexpected fall in UK manufacturing output raised doubts about the British economy’s recovery prospects. Rates at 08:30am are as follows:

  • GBP/EUR 1.0815
  • GBP/USD 1.5916
  • GBP/AUD 1.7827
  • GBP/NZD 2.1615
  • GBP/CAD 1.6804
  • GBP/JPY 140.72
  • GBP/CHF 1.6368
  • GBP/ZAR 11.775

Analysts said the market was caught off guard and surprised by the weak production data, and this drove investors back towards the safe haven US Dollar. The net result is slightly lower exchange rates. The currency markets at the moment are prone to react strongly to weak data, and the problem with the pound, is that it is already trading with a negative bias, so any negative number for the UK is a signal to sell sterling, and this is what’s keeping rates low at the moment.

The dramatic fall in UK industrial production followed a mixed bag of economic data in the past week, and raised the prospect that the economy may not return even to slight growth later in the year, as the UK government expects.

With Tuesday’s poor data out of the way, the market now looks forward to the announcement by the Bank of England tomorrow. The BoE is expected to keep interest rates at a record low 0.5% and maintain the pace of its asset purchases (Quantitative Easing)

Analysts expect the central bank to wait until its next set of growth and inflation forecasts in November before making any alteration to monetary policy, however there is the chance further measures will be announced tomorrow. It’s impossible to call, but much of the expected weak data for the pound is already priced into the market. So, if no announcement is made for futher QE, expect rates to rise slightly. If further QE measures are indeed announced, we may see rates drop further.

Summary
So, regardless if you are buying Euros or Selling Euros, rates could move either way in the next few days. It’s in uncertain times like this that Stop Loss and Limit Orders are very effective. As markets could swing in either direction, a Stop Loss order means that should markets move against you, your currency gets secured at a pre-agreed level, limiting any loss from negative movements. Limit orders are the opposite – you place an order to buy at a rate perhaps not currently available.

This means that should markets move in your favour, you can take advantage automatically, while the Stop Loss protects you meaning you’re not simply gambling and hoping the market moves your way. Simply ‘wishing’ the market up is not a reliable economic tool. Currency tools like Stops and Limits allow you to control the market, rather than the other way around!

Australian Dollar
The BoE’s position of keeping rates low contrasted sharply with the Reserve Bank of Australia’s decision to raise rates by 25 basis points to 3.25 percent yesterday. The resulting expansion in official rate differentials ignited a rally in the Australian dollar, and the pound to Aussie Dollar exchange rate hit it’s lowest since 1985. This is not good if you need to purchase AUD.

Earlier in the year I posted several forecasts suggesting that this may indeed happen, and many clients that wanted to buy AUD placed a Stop Loss order just in case. This meant they could still aim for a higher rate, but have not lost out now rates have indeed continued to fall.

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