Friday 8th July 2011
Good morning. As expected yesterday, the Bank of England left interest rates on hold, and the ECB raised rates to 1.5%. After the usual snapshot of rates we’ll look at the effect of this on exchange rates.
• GBP/EUR 1.1142
• GBP/USD 1.5958
• GBP/AUD 1.4805
• GBP/NZD 1.9151
• GBP/CAD 1.5294
• GBP/ZAR 10.657
• GBP/JPY 129.73
• GBP/DKK 8.3105
• GBP/NOK 8.6163
• EUR/USD 1.4313
Bank of England
As widely expected, rates were left on hold at 0.5% yesterday, and analysts do not expect any rise until well into 2012. The BoE also decided to not pursue any further quantitative Easing, and due to this there were slight gains for Sterling. There were also slightly better manufacturing numbers yesterday, helping the pound gain slightly.
Any increase in rates were shot lived however, and the numbers did little to change overall market expectations that the Bank of England will leave interest rates at a record low 0.5% for some months to come.
Sentiment towards the pound was further dented by leading thinktank the National Institute of Economic and Social Research, which said British economic growth slowed to just 0.1 percent in the second quarter of this year. We expect further falls for Sterling in the coming weeks and months.
European Central Bank
In contrast, the European Central Bank raised rates by a quarter of a percentage point to 1.5% as expected, further widening the interest rate differential between the UK and the euro zone, a factor that will keep the pound subdued. As this was widely forecast, it was mostly priced into exchange rates already, and so initially after the decision there was no movement at all in rates.
In the press conference afterwards however, the president of the ECB made comments suggesting there would be further interest rate hikes to come in the Eurozone, and this strengthened the single currency slightly and pushed GBP/EUR rates down as we had expected would be the case.
Summary: Getting best exchange rates Buying Euros / Selling Euros
The interest rate differential between the UK and EU is increasing, and this is likely to keep Pound vs Euro rates low. Unless we start getting good economic figures from the UK signalling a faster recovery, there is not much to suggest Sterling will gain strength. Indeed the latest forecasts we read suggest GBP/EUR rates could fall to €1.06 / €1.07 in the coming months.
However, if there are further debt problems in the EU such as Portugal or Spain requiring financial assistance, this could weaken the Euro back off again. So it’s very hard to know which way rates will move, as the relative economies are being pulled in different directions.
Despite the uncertainty, there are measures you can take to protect against lower rates while still holding for an increase. Contact us today for a free consultation on the contract types we offer, and how you can take control of your currency requirement and achieve the best exchange rates.
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