Pound falls on UK Banking news.

Good Morning. Sterling dipped against the US Dollar yesterday after the UK Treasury announced a major shake up of British banks and investors braced for a possible extension of asset purchases by the Bank of England this week. The pound rose against a broadly weaker Euro. Rates @ 08:30am are as follows:

GBP/EUR 1.1165
GBP/USD 1.6479
GBP/AUD 1.8193
GBP/NZD 2.2770
GBP/CAD 1.7512
GBP/CHF 1.6872
GBP/JPY 149.46
GBP/ZAR 12.735
EUR/USD 1.4753

The news that the major banks that the government bailed out will be split up shook Sterling yesterday. You can read a report on the issue on the BBC website here: http://news.bbc.co.uk/1/hi/business/8340627.stm

As finance is one of the biggest parts of the UK economy, this will likely affect the pound. Indeed Sterling fell against the US Dollar yesterday, but due to weakness in the Euro, GBPEUR rates actually rose slightly despite the news.

“Clearly this is not good news for UK PLC, but it is not happening in isolation – the banking sector in general across the euro zone is under pressure too,” said Jeremy Stretch, strategist at Rabobank. This explains why the news didn’t affect GBPEUR as much as other currency pairs.

In other banking news, HSBC has announced a cut of 1,700 jobs in the UK. The job losses will come from retail banking, but will come from support services rather than branches. HSBC employs 40,000 people in its UK retail operations, and more than 300,000 employees worldwide.

The main news remains the BoE meeting, which starts today with the announcement tomorrow lunchtime. We expect rates to be left on hold at the record low, but most analysts do expect further Quantitative Easing measures. This will likely hold back any gains for the pound, and could in fact cause rates to fall. We await the announcment tomorrow and will look to see what the effect of further measures will have on exchange rates.

Those that are risk averse, and dont wish to take a gamble on rates falling should consider fixing a rate in advance with a Forward Contract, or place a Stop Loss order to protect against a fall, while still allowing you to aim for a higher rate should the BoE not announce QE.

Aussie Dollar
Australia has raised its main interest rate for the second month in a row, to 3.5% from 3.25%.
The move by its central bank was not unexpected as the Australian economy was the only one in the developed world to expand in the first half of 2009. In fact, Australia managed to avoid recession, only seeing its economy contract in the last quarter of 2008.

Also, the release of the lowest inflation figures in 10 years last week added to expectations of a modest rate rise. “With the risk of serious economic contraction in Australia now having passed, the board view is that it is prudent to lessen gradually the degree of monetary stimulus that was in place when the outlook appeared to be much weaker,” he added.

So, higher rates strenghten the currency and make it more expensive to purchase. Rates in Australia have historically been high, and this could signal a return to higher rates in the near future. So, if you need to buy AUD, with the weak pound and the Aussie getting stronger, it’s likely that rates may continue to struggle.

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