Pound remains weak on speculation of more QE

Good Morning. The pound fell slightly yesterday despite good manufacturing data. Sterling’s rally has stalled, pulling the UK currency back from its highest levels versus the dollar and the euro in more than a month hit in late October, and analysts said traders were unwilling to take on big bets before the BoE policy announcement on Thursday. Rates @ 08:30am are as follows:

  • GBP/EUR 1.1056
  • GBP/USD 1.6311
  • GBP/AUD 1.8193
  • GBP/NZD 2.2770
  • GBP/CAD 1.7597
  • GBP/CHF 1.6701
  • GBP/JPY 146.71
  • GBP/ZAR 11.654
  • EUR/USD 1.4749

GBP/EUR
The Euro stabilised towards the end of last week after early losses against Sterling. Consumer prices in the Euro zone fell 0.1% during the year and combined with a slowdown in money supply growth, to 1.8% in September from 2.6%, made October the fifth consecutive month that the annual rate has remained negative.

In turn this raised fears that the European Central Bank (ECB) may need to keep interest rates low in order to maintain support for the economy. Finally, the week ended with the announcement of a 9.7% unemployment rate, the highest since the Euro’s introduction.

The GBP/EUR rate closed up 2.66% last week at 1.1159, from 1.0870 a week earlier, benefiting those converting Sterling into Euros. Those looking to do so in the future should discuss the possibility of a forward contract in order to take advantage of today’s rates up to two years into the future.

This week sees the release of the latest interest rate decision by the European Central Bank on Thursday. With a no-change decision widely expected the Euro is likely to gain strength and with it weaken GBP/EUR exchange rates.

Finally, coupled with the prospect of further Quantative Easing by The Bank of England on Thursday those looking to purchase Euros should perhaps be considering the possibility of doing so before rates fall further. As mentioned above, despite much better than expected manufacturing data, the fact that more QE is expected overshadowed the good news, and is keeping the pound weak.

Many in the market expected further sterling downside as the BoE is seen keeping interest rates at a record low of 0.5 percent until at least mid-2010, while continuing to buy domestic assets to pump funds into the market.

“We expect to see considerable sterling-downside as Thursday’s meeting approaches, and an extension to the QE programme is likely to be greeted with renewed sterling weakness,” analysts at UBS said in a research note.

US Dollar (USD)
The US Dollar lost ground against Sterling last week, but finished higher relative to most other major currencies. As investor confidence in global economic recovery prospects waned, the US Dollar generally found support amid the weakness in global stock markets a characteristic relevant to its safe haven status. The GBP/USD rate closed up 0.85% at 1.6445, from 1.6306 a week earlier.

Brighter news came as the US economy exited recession, with US GDP expanding at a year on year rate of 3.5%. This was the first positive reading since the second quarter of 2008, but the US Dollar weakened slightly following an associated lift in investor risk appetite benefiting some major currencies such as Sterling.

Several key releases this week could induce greater volatility in foreign exchange markets. The US Federal Reserve’s interest rate policy meeting is scheduled for Wednesday. Whilst no major policy changes are anticipated, changes in its assessment of economic conditions might impact on US Dollar exchange rates.

Finally Friday’s Non-Farm Payroll report which has played an important role in the past with exchange rate movement will clarify conditions in the US Employment Market.

Conclusion
Christmas could come early if you need to repatriate your funds from the Dollar or Euro as the majority of the financial industry is expecting further QE which will result in sterling weakness however, if risk appetite plays another role in the markets the initial weakness may well be short lived.

If, however you wish to buy a currency with Sterling, to avoid getting stung it would be wise to consider doing so before the BoE’s announcement on Thursday. Even if your currency is not needed for up to 2 years, you can still fix the current rate if you have a 10% deposit of the total. This then protects you from any downturn, and gives you peace of mind in knowing exactly what your currency will cost.

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