Pound breaks €1.20 vs Euro on BoE inflation report

Thursday 16th February 2012
Good morning. Sterling rose against the Euro yesterday on the back of the Bank of England inflation report, pushing a cent higher and breaking through the €1.20 level. Against the Dollar, we ended slightly lower. Today after the snapshot of yesterdays movements I’ll cover how Sterling exchange rates may be affected by: The inflation report, UK unemployment, the prospects for UK recovery, and faltering UK growth.

~Currency Movements on Wednesday 15th February 2012~

UK Unemployment

As you can see from the chart above, as trade opened GBP/EUR rates fell due to UK unemployment figures. UK unemployment rose by 48,000 to 2.67 million in the three months to December, official figures have shown, the smallest rise in almost a year. However, the number of claimants was nearly double the forecast, and so Sterling took a hit pushing lower to €1.19 on the Euro and in the $1.56’s against the Dollar. The Pounds fortunes were soon to change however, following the Bank of England’s inflation report….

Bank of England inflation report

The UK economy will “zigzag” this year, dipping in and out of growth, but should avoid going back into recession, Bank of England chief Sir Mervyn King has said. The Bank’s quarterly inflation report predicts the economy will grow by 1.2% and forecasts inflation will continue to fall in the coming months.

However, it now predicts inflation will decline to 1.8% by 2014, not as low as the previous estimate of 1.3%. So why did this cause the Pound to rise against the Euro? The revised inflation figures make it less likely the BoE will pursue further Quantitative Easing, at least in the short term, and it is this that pushed the Pound back through the €1.20 level against the Euro, getting closer to the 18 month highs we saw in recent weeks.

“The fiscal consolidation and tight credit conditions at home and the weakness of our major overseas trading partners are acting as a drag on growth,” said Sir Mervyn.

“The underlying need for repair of balance sheets means that the path of recovery is likely to be slow and uncertain. For much of this year, there is likely to be a zigzag pattern of alternating positive and negative quarterly growth rates.”

However exposure to the Eurozone debt crisis could keep any further gains in check. Analysts said given UK’s high exposure and strong trade links to the euro zone, sterling’s gains would be muted against the US Dollar and Euro, and as such many remain bearish about its prospects in the months ahead.

They also expect austerity measures to hurt the UK economy which would derail deficit reduction, raising prospects of a downgrade of its AAA rating.

Today’s Data

Let’s start in Australia where we will see Inflation data in addition to unemployment figures. In Europe a report is released by the European Central Bank. Further afield in the states we have various Jobless measures and various numbers showing inflation. After all the data is released one of the FEDs members gives a speech.

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