Effect of Interest Rates on Exchange Rates

10th June 2011
Good morning. Both the UK and EU left interest rates on hold yesterday as expected, but the EU signalled rates would rise in July. We’ll take a detailed look in a moment on how this may affect exchange rates in the coming months. First, the usual snapshot of rates as at 08:30am:

  • GBP/EUR 1.1260
  • GBP/USD 1.6271
  • GBP/AUD 1.5354
  • GBP/NZD 1.9742
  • GBP/CAD 1.5876
  • GBP/CHF 1.3711
  • GBP/ZAR 10.997
  • GBP/JPY 130.20
  • GBP/DKK 8.3965
  • GBP/NOK 8.8654
  • EUR/USD 1.4448

UK Interest Rates

The Bank of England yesterday left interest rates on hold for the 27th month in a row. This is due to stagnant growth. Most analysts now don’t expect interest rates to go up until well into 2012, and as such Sterling is likely to remain weak.

Higher interest rates strengthen a currency due to the higher return attracting investors to the currency. As rates are at a record low and likely to remain so for quite some time, Sterling will remain weak.

EU Interest Rates

The ECB also left interest rates on hold, however in the press conference afterwards they indicated rates would go up in July. This was also expected, and as investors booked profits on the Euro it caused GBP/EUR rates to rise slightly.

It was also signalled that further rate rises would come in the EU, but perhaps not as fast as some analysts were expecting. This paring back of future rate hike expectations also helped slightly to push GBP/EUR higher.

So what does this mean for exchange rates?

As outlined above, higher rates in the Eurozone will attract investors to the single currency. This is likely to cause strength in the coming months and make the Euro more expensive to purchase. So we expect GBP/EUR could drop in the coming months as we get closer to a rate hike in the EU.

Today’s Data

An incredibly busy day for UK data. We have: Industrial Production, Producer Price Index, Manufacturing Production and Industrial Production. All of these are released at 09:30am, and will give a very good overview of economic health. Depending on the results, we could see big swings in exchange rates today.

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