Good morning. It’s bright sunny morning in London, and as the day gets going Pound/Euro is slightly lower due to the Budget and a strengthening of the Euro. Pound/Dollar rates however have risen due to news from the US Federal Reserve.
Read on for a more detailed look at why exchange rates have moved…..
Growth forecasts cut in Budget
In my most recent post I outlined the effect the UK Budget may have for Sterling exchange rates, citing any change to growth forecasts as the main risk for the Pound. This proved to be the case, as growth forecasts were indeed cut for the next 5 years, which weighed slightly on the Pound. There were some fairly decent UK Employment numbers yesterday however that limited the drop for Sterling, but overall there was a slight drop for Pound/Euro rates, as the chart below shows:
Bank of England news at 12pm today
At 12pm today the Bank of England releases its interest rate decision, and I would expect rates to remain at 0.5%. We will also see how the 9 member committee voted, and I expect all 9 members to have voted for rates to stay at their record low.
The interesting part of today’s release will be the minutes showing what has been discussed, and the press conference from Governor Mark Carney. Any comments he makes will be watched closely and if he is negative about the economy, the Pound will fall. If he is bullish, the Pound may rise but I think this is unlikely.
GBP/USD up as FED holds rates
In other news, last night the US Federal Reserve held interest rates, and indicated that in 2016 they would be raising only twice more. Markets had been expected 4 further rate hikes this year, so the more dovish tone had the effect of weakening the US Dollar, and as the chart below clearly shows, as soon as the news was released at 6pm, GBP/USD jumped by almost 2 cents:
This is because a slower rate of rate increases makes the US Dollar less attractive to investors due to the lower return, and the Dollar was sold off becoming cheaper to buy. Also, because the most commonly traded currency is USDEUR, in general when the Dollar is sold, the Euro is bought. This is another reason for the drop in GBP/EUR rates this morning, as investors bought USDEUR causing the single currency to gain in strength and become more expensive to buy.
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