May Currency Update

Sterling had a less expensive April than the three and a half euro cents it had managed to mislay in March but it was still a losing month, with the pound down by a net cent. That is not to say sterling had a quiet time.  Up two cents, down three, up two, down two, it was anything but steady, even if the absolute range was not spectacular.  By wedding day, after bouncing twice from around €1.12, it looked as though that had become the critical support level.

For an umpteenth month it was investors’ hopes and fears for UK interest rates that were mainly responsible for sterling’s ebb and flow.  It was mostly a case of ebb, as one statistic after another added weight to the notion that the first rate increase would almost certainly not now come in May. It might be August but there are plenty of analysts out there who think November looks more likely.

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It did not help sterling when inflation dropped from 4.4% to 4.0% in March. Few had expected such a drop so the surprise element added to the dampening effect. The Bank of England’s decision to keep interest rates steady at 0.5% was therefore fully expected. Once again the monetary policy committee’s voting decision had six members preferring to stick with the status quo while the same old three favoured a rate increase. Towards the end of April even that small hawkish clique was looking shaky. Two of the trio said publicly that they would stop voting for an increase if economic growth were to weaken and one, their ringleader Andrew Sentance, ends his term on the committee after next month’s meeting. It suddenly began to seem possible that there would be note votes at all for a rate increase in June.

 

The weakness of the UK economy was confirmed by the figures for first quarter gross domestic product (GDP), which grew by 0.5% as analysts had forecast. On its own it was not an awful figure but all it achieved was a reversal of the -0.5% shrinkage experienced in the fourth quarter of last year. Take the two together and Britain’s economy has stagnated for six months, not at all the required outcome. The best that could be said of the GDP number was that it might have been worse.

 

The euro zone GDP data for Q1 have yet to appear but that has not held back the euro. As investors toned down their expectations for higher sterling interest rates they cranked up their enthusiasm for rising euro rates.  The first increase came, as promised by the European Central Bank (ECB), when it raised its Refinancing Rate to 1.25% after 23 months at 1.0%. The move had been so well telegraphed by the ECB that there was no element of surprise, just confirmation that things really were on the move in Euroland.  Whilst there was no hint from the ECB president that another increase would follow in May, few investors are in any doubt that there will not be more in the pipeline.  Two Euroland central bankers confirmed as much later in the month. Austria’s Ewald Novotny said the market’s expectation of a further 50 basis points’ increase in the refinancing rate by the end of the year is “well founded”. Luc Coene of Belgium said “conditions are too accommodative”. The next move might not happen in May but it will come, and there will be more to follow

 

It is mainly that difference that is driving the sterling/euro exchange rate at the moment. The problems of Greece and Portugal are almost a side-issue. In Britain inflation is 4% and the Bank of England is rooted to its 0.5% Bank Rate for what seems like the duration. In Euroland inflation is 2.7% and the ECB is doing something about it; there is every chance that the refinancing rate could be above 2.5% by this time next year. As long as that distinction remains, the pound will find it hard going

What next? 

Call +44 (0)20 7428 4910 (Open Monday to Friday 9.00am–7.00pm)

> Open a Currency account today

> Request a call back

> Ask questions about Currency Exchange

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This entry was posted on Thursday, April 28th, 2011 at 12:11 pm and is filed under Bank account, Currency exchange, Finance, Money transfer, Price reduction, Property Investment, Real estate market . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.


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