Pound falls after secret £60bn loans revealed.

Good Morning. Sterling fell yesterday as concerns about the Banking sector dented appetite for riskier currencies, while Bank of England policymakers offered little insight into the outlook for monetary policy. At 08:30am rates stand as follows:

  • GBP/EUR 1.1127
  • GBP/USD 1.6710
  • GBP/AUD 1.8019
  • GBP/NZD 2.2841
  • GBP/CAD 1.7598
  • GBP/CHF 1.6792
  • GBP/JPY 147.50
  • GBP/ZAR 12.373
  • EUR/USD 1.5012

UK Banking Sector
The Bank of England yesterday revealed secret loans to UK banks last year of more than £60 Billion pounds. It was also revealed that Chancellor Alistair Darling had agreed to underwrite any losses which the Bank may have made on the loans.

It’s headline news, and rather than repeat it all here, you can see a detailed report on the BBC website here. In terms of the effect on the currency markets, finance forms a huge part of our conomy, and is also our biggest export. This news will do little to spur confidence in the economy, and the pound has fallen as a result.

The big question is what else is there that we don’t know? There is already talk of the UK’s credit rating being downgraded, and this will fuel that speculation, and will hurt the pound. The governor of the BoE, Mervyn King, again said a weak pound was needed to help the ecomomy, which is not what clients needint to buy foreign currency need to hear!

Analysts said King’s comments offered limited new direction in terms of policy outlook, while underlining differences among members of the bank’s interest rate-setting committee who recognise the economy has been slowly improving and those who are cautious about normalising monetary policy.

“There’s a fair amount of division in the committee and this is holding sterling back,” said Phyllis Papadavid, currency strategist at Societe Generale in London. “The lack of certainty around policy is a big driver of sterling today.”

US Economic Growth
The US economy grew by far less than originally forecast between July and September, according to revised official figures. The latest estimate said the economy grew at an annual pace of 2.8%. That compared with the 3.5% the Department of Commerce initially forecast earlier this month.

The change in the gross domestic product figure came partly because imports, which count as negative, were higher than thought. Imports increased at an annual rate of 21%, the biggest gain since the second quarter of 1985, and a big jump on the 16% first thought. US GDP is expressed as an annualised rate, or annual pace, which shows what the annual rate would be if the latest change continued for the rest of the year.

Usually, good data from the USA would strengthen the dollar, and we would see GBPUSD rates fall. However, as USD is a safe haven currency, good news spurs investors into riskier currencies. Unfortunately the pound is not very attractive, and so other currencies such as AUD benefited. As investors pull out of the USD, it actually weakens it and GBPUSD rates have gone up despite the bad news from the UK, however this is purely dollar driven.

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