Sterling fell broadly on Wednesday, hitting a three-week low against the euro after the Bank of England released dovish inflation forecasts and left open the door to extending quantitative easing. Fears on Greek debt kept rates falling too much as the Euro weakened. Rates @ 08:30am are as follows:
- GBP/EUR 1.1324
- GBP/USD 1.5594
- GBP/AUD 1.7538
- GBP/NZD 2.2256
- GBP/CAD 1.6486
- GBP/CHF 1.6611
- GBP/ZAR 11.937
- GBP/JPY 140.15
- GBP/NOK 9.166
- EUR/USD 1.3767
Bank of England
BoE forecast price increases would be well below its 2 percent target in two years’ time if interest rates rise as markets predict, suggesting rates could stay at record lows for longer than previously thought.BoE Governor Mervyn King added to the dovish tone, saying it was “far too soon” to conclude that the bank’s quantitative easing programme was over and said further asset purchases would be made if necessary. The fear of more QE means the pound is not attractive to investors, and fell as a result.
The BoE inflation report highlighted the fact that fundamentally and domestically the picture is very negative and this is a bearish environment for the pound. The BoE forecast the economy would recover only very slowly, with output taking until around mid-2011 to return to pre-crisis levels. GDP growth is seen at around 3.5 percent in two years. This doesn’t bode well for those hoping GBP rates would rise throughout this year.
Greek debt problems
The question of how to contain Greece’s debt problems and ease pressure on the euro will weigh heavily on EU leaders when they meet in Brussels later.
The 27 leaders are under pressure to give a clear signal to financial markets that Greece’s budget crisis will not destabilise the euro.
EU rules prevent eurozone members from jointly bailing out Greece, but bilateral help might be forthcoming. So far the decline of the euro has been substantial – about 9% since early December
Pound Euro rates
The Euro has been weakening that has helped push GBPEUR rates up. Now with the BoE comments, coupled with fears the UK is in a similar position to Greece means the pound has been weakening also. The two have effectively cancelled each other out, and rates remain at around the €1.1320 mark.
If Greece is bailed out, it may cause Euro weakness. This would normally cause rates to rise, however with the backdrop of BoE comments and a weak pound, I don’t think we’ll see significant gains.
US – Fed end stimulus
The chairman of the Federal Reserve, Ben Bernanke, began on Wednesday to outline the central bank’s strategy for withdrawing its stimulus money.
During the crisis the Fed greatly expanded the credit available to banks to encourage lending, and the new measures would reverse that.
This all points to a stronger US Dollar, which means lower GBP/USD rates. If you need to buy dollars, consider Stop and Limit orders to protect you against a fall.
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