Tuesday 18th February 2014
We have seen Sterling lose ground today after lower than expected inflation numbers were released this morning. As you can see from the chart below, GBP/EUR rates slipped around 0.5% but levels remain in the mid €1.21’s.
So why exactly does lower inflation cause the exchange rate to drop?
The UK’s inflation rate, as measured by the consumer prices index, fell to 1.9% in January. The rate fell below the Bank of England’s 2% target for the first time in more than four years. While this is good for business’s and individual consumers, it’s not good news for Sterling, and this is to do with interest rates.
The fall is likely to underline the Bank of England’s message that there is no rush to raise interest rates, as they would usually only do this to combat high inflation. So as the number was lower than expected, analysts believe this has pushed a rate hike further into the future. It has been the speculation of higher interest rates that has been the main reason for the recent rise in rates, so as the data changes, as does the value of the Pound. The net result is Sterling having lower value and rates falling.
Is this a temporary drop? Will rates go back up again?
Tomorrow is a very important day for the Pound, and will likely have a big impact on where exchange rates go in the coming weeks.
At 09:30am tomorrow we will see the latest UK Unemployment figures. The number will probably be just above 7%, but if it’s lower than this the Pound may regain some of today’s losses.
Also at 09:30am we see the Bank of England minutes, which show the vote and what was discussed a few weeks ago when they left rates and QE on hold. These will be of importance because if the votes and comments show they discussed raising rates, the Pound may rise.
Of course if unemployment is 7.1% of higher, or of the BoE minutes show a consensus rates don’t need to go up, then expect the Pound to lose more value and rates to drop further.
Exchange rates at multi-year highs
In my recent post I outlined some major currency pairs and how good exchange rates are at the moment. It seems the recent trend of a spike in rates followed by a drop is continuing, so if you need the best exchange rates, why not get in touch to discuss your requirements.
I can explain what is moving the rate, provide you a quote to compare with your existing bank or broker, and you can make sure you are getting the best possible rate.
It costs nothing to make an enquiry, carries no obligation, and the savings can be considerable.
Click here to send me a free no obligation enquiry.
I look forward to hearing from you.