Pound weakens ahead of BoE inflation report

Wednesday 16th November 2011
Good morning. Sterling fell against the US Dollar yesterday as investors were worried ahead of the Bank of England’s Quarterly Inflation Report, which is expected to be dovish and clear the way for more monetary easing. Against the Euro however rates remain stable due to the EU debt crisis keeping the Euro weak. At 08:30am this morning rates are as follows:

• GBP/EUR 1.1703
• GBP/USD 1.5795
• GBP/AUD 1.5583
• GBP/NZD 2.0538
• GBP/CHF 1.4501
• GBP/CAD 1.6177
• GBP/ZAR 12.8755
• GBP/JPY 121.50
• GBP/DKK 8.7075
• GBP/NOK 9.1051
• EUR/USD 1.3493

Sterling weakens ahead of BoE Inflation report

Today we have an inflation report by the Bank of England. Many in the markets expect it to be quite dovish, and pave the was for further monetary stimulus with the BoE pumping more money in the economy through Quantitative Easing. Such speculation is sterling negative as quantitative easing involves flooding the market with pounds to stimulate growth, reducing demand for the UK currency.

This has weakened Sterling and pushed exchange rates down against most currencies.

Pound remains stable against the Euro

Despite the focus on the BoE report weakening the Pound against other currencies, analysts said the key driver for investors remained the euro zone debt crisis as yields on benchmark Italian government bonds rose back above the critical 7 percent level on Tuesday. This has been keeping the Euro weak, and means GBP/EUR rates have not dropped like other currency pairs.

“Within Europe, sterling has a bit of a safe haven tinge but the bigger picture is of a slightly stronger dollar across the board,” said RBS’s Robson. “That’s why cable is falling but not as quickly as euro/dollar is falling.”

Many investors have sold the euro in favour of the pound this month on the view that UK assets are safer than some euro zone ones in light of the deepening debt crisis in that region. The weak Euro is therefore cheaper to buy, and exchange rates are close to an 8 month high as a result.

The Dollar has also strengthened due to it’s safe haven status, and GBP/USD rates have fallen back into the $1.57’s. This is only due to the EU crisis however, and not due to any fundamental strength in USD. Once focus shifts from the Eurozone we expect rates to recover back above $1.60.

Today’s Data

In addition to the inflation report, unemployment figures from the UK today could affect Sterling. EU inflation figures may impact future EU interest rate decisions. In the USA we have various inflationary measures. There are also inflation figures from New Zealand today that could affect GBP/NZD rates.

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