Wednesday 19th October 2011
Good morning. Sterling fell yesterday after inflation was higher than expected. We have the Bank of England (BoE) minutes today which analysts also expect to be dovish, so the Pound is bracing itself for a possible further drop. At 08:30am this morning rates are as follows:
• GBP/EUR 1.1411
• GBP/USD 1.5764
• GBP/AUD 1.5290
• GBP/NZD 1.9716
• GBP/CHF 1.4153
• GBP/CAD 1.5932
• GBP/ZAR 12.525
• GBP/JPY 120.92
• GBP/DKK 8.4917
• GBP/NOK 8.8114
• EUR/USD 1.3814
UK Inflation data weakens the Pound
The rate of Consumer Prices Index (CPI) inflation yesterday hit its record high in September, rising to 5.2% from 4.5%. This was higher than expected, and the latest RPI measure is the highest annual rate since June 1991.
The Bank of England had already predicted that inflation would top 5% this year as a result of higher utility bills, but it expects price rises to slow in 2012 and 2013. Despite the high numbers, many economists agree with the Bank of England that inflation may soon start to fall.
Usually when inflation is high, it signals interest rates may rise to combat it. Higher interest rates create demand for a currency and it would usually strengthen. In the current climate however with interest rates at record lows, the high inflation numbers actually weakened the Pound. This is because stagflation (high inflation with low growth) means rates have to stay low, and as a result Sterling weakened and fell against other currencies.
BoE minutes today
At 09:30am today the Bank of England release the minutes to it’s latest decision to hold interest rates and pump £75 billion into the economy with Quantitative Easing. Because analysts expect the minutes to be quite dovish, this has also had an impact the Pound, weakening it and pushing exchange rates lower. The minutes show what was discussed and how the voting went.
Sterling vs Australian Dollar
The Australian dollar gained against the Pound yesterday, on reports that France and Germany were ready to sharply boost the eurozone’s rescue fund amid a solid performance on regional equity markets. This combined with the weaker pound has pushed GBP/AUD rates down from it’s highs in the last month, and this is expected to continue while the Pound remains under pressure.
Moody’s downgrade Spain
Moody’s has downgraded the rating of Spain’s government bonds. The ratings agency cut Spain two notches, two days after Standard & Poor’s took the same decision. Moody’s said it had cut the rating because there had been no credible resolution to the eurozone debt crisis.
There has been little effect on the currency markets, because there has been so many downgrades of the main economic zones, the currency markets now seem to be paying little attention any more.
Today is quite important for Sterling, as we see the BoE minutes to their recent decision to pump £75bn into the economy. We will see what was discussed and how the vote went, and may well impact on the value of the Pound. There are further inflation numbers from the USA today, but no data of note from the Eurozone.
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