18th January 2011
Good morning. The pound recovered against the Euro yesterday, and hit a 2 month high vs the US Dollar. Sterling was boosted by data showing improving UK consumer confidence. Rates as at 08:30am are as follows:
- GBP/EUR 1.1925
- GBP/USD 1.5968
- GBP/AUD 1.5985
- GBP/NZD 2.0663
- GBP/CAD 1.5719
- GBP/CHF 1.5298
- GBP/ZAR 10.921
- GBP/JPY 131.69
- GBP/HUF 325.08
- EUR/USD 1.3383
Why has Sterling gained?
The pound gained against other currencies due to speculation that rising inflation could prompt the Bank of England to raise interest rates, possibly as soon as May. The pound also benefited against a broadly faltering euro, which suffered as last week’s rally lost steam and investors sought clearer signs that progress was being made to improve the euro zone’s sovereign safety net.
Today we have more inflation data for the UK today. If the consumer price index is higher than expected, it will give more reason for the Bank of England to raise interest rates to combat rising prices.
Higher interest rates mean a higher return for investors. This spurs investment into the UK creating demand for Sterling. It’s this demand that could strengthen the pound further.
So is it a given the BoE will raise rates?
The Bank of England should “hold its nerve” and avoid pressure to raise interest rates, an influential economics forecaster has said. The Ernst & Young Item Club says any increase in the bank base rate from the current historic low of 0.5% could endanger the economic recovery.
The Bank should stand firm against temporary pressures such as the VAT rise, it says. Meanwhile, Deloitte is warning of a “bumpy road to recovery”. In its 2011 UK economic review, it says it expects GDP growth this year and next of just 1.5%.
Peter Spencer, chief economic adviser to the Item Club, said any rate rise now by the Bank of England would be a mistake. “If the Bank has been pushed into a rate rise this year it will find itself with a depressed economy, a low rate of inflation below target, and of course having to cut interest rates,”
So some think there will be higher rates, others think that the BoE should hold off for any rate rises until much later this year. While this uncertainty continues it’s likely the volatility in Sterling exchange rates will also continue.
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