Wednesday 29th September 2012
Good morning everybody. Today I’m posting a quick mid-week update on what’s been happening with exchange rates, and what may happen in the coming days and weeks. The Pound has recovered a little against the Euro, but is not likely to continue gaining much. Against the US Dollar the Pound remains at a 5 month high. Let’s have a more detailed look at each currency pair in turn.
Sterling has risen a little against the Euro into the mid €1.24’s following uncertainty about Spain. The concerns encouraged investors to take profit on some of the single currency’s recent strong gains, and this helped the GBP/EUR rate recover slightly. Concerns are growing about whether and when Spain will seek a bailout, while a German investor survey highlighted concerns about Europe’s largest economy.
The results of a financial stress test on Spain’s banks are due to be published on 28 September, and will provide a basis for calculations as to which banks should receive European Union funds and how much they should get. This may weaken the Euro slightly, however I think events in the UK over the coming days will take precedent which I’ll look at in a moment. All in all I think the Pound/Euro rate may fall further due to the weak UK economy.
The Sterling/Dollar rate has not moved much this week, but has risen slightly and remains near a 5 month high. It’s due to weakness in the US Dollar after the announcement of open ended Quantitative Easing in the USA.
If we don’t get any negative UK data in the coming days, I think GBP/USD could rise a little further. If you need US Dollars, while it may rise further this is no guarantee. Given rates are at their best for many months, if I needed USD I would place a Stop Loss order a rate a little below the current level. In this way I can continue to take advantage of any gains, but if things go the wrong way and move against me, I have a worst case scenario.
Yesterday we saw that UK inflation dipped slightly in August despite a rise in oil and fuel costs. This kept alive prospects of the Bank of England injecting more cash into the economy later this year which might weaken the Pound.
Sterling has been quite well supported by better UK data in recent weeks, which has eased concerns about the growth outlook. The inflation data didn’t really have any effect on exchange rates, as it does not change the balance of expectations over whether the Bank of England will increase its asset-buying programme later this year.
Bank of England minutes – more QE on the cards?
I expect more QE in November, but of course today’s BoE minutes may give us a cleared idea of what to expect. Today at 09:30am the minutes are published, and they will show what was discussed and differences of view during their last meeting on QE and interest rates.
Analysts suggested that the falling inflation rate eased concerns that the Bank’s policy of pumping money into the economy to stimulate demand – known as quantitative easing (QE) – could lead to inflation picking up. The UK economy has contracted for the past three quarters and the Bank announced another £50bn of QE in July, taking the total amount of money it has injected into the economy under this programme to £375bn.
Some analysts suggested this total could rise again later this year, as the economy struggles to exit recession. If there is any hint of QE any time soon, the Pound may take a little dip against other currencies.
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