Foreign Currency Report – 9th May 2008
The big news affecting the foreign currency markets yesterday was the announcement of the interest rate decisions from the Bank of England's Monetary Policy Committee and the European Central Bank and there was much volatility to reflect anticipation leading up to the decisions and the movement in currency exchange rates once the decisions had been released.
At midday yesterday the Bank of England released their decision to keep the UK interest rate on hold at 5%, a decision that was widely expected by many analysts. However this decisions was by no means a certainty as recent weak economic data from the UK sparked suggestions in the market of a rate cut in the UK of up to 50bp, which could have led due dramatic losses in the Pound exchange rate.
Shortly after the announcement from the Bank of England followed the decision of the ECB, who also made the decision to keep the base rate in the Eurozone on hold at 4%, where it has remained unchanged since last June. This was a unanimous decision, with all members of the ECB's governing council opting for the hold as opposed to a rate cut or hike. This was seen by traders as an indication that the possibility of a rate cut in the Eurozone as still being a long way off.
As a result of the two rate decisions we saw the Pound exchange rate pull back from the 10 week low against the US Dollar, being up 0.2% against the greenback by midday in New York. We also saw initial strength in the Pound against many other currencies including the Euro as keeping the interest rate was a more positive move than the rate reduction that was becoming a possibility as the announcement approached, therefore increasing some confidence in sterling and causing the currency to strengthen slightly.
Meanwhile yesterday saw the Euro exchange rate fall to a 2 month low against the US Dollar but then following the Trichet's press conference the single European currency rose 0.2% against the Dollar and pulled back 0.1% against Sterling.
So what's going to happen next? The hold on the base rate in the UK yesterday has now increased analysts expectations that there will be at least a 25bp cut in the UK interest rate in June when the BOE next meets. This fuelled by weak economic data and the possibility of recession in the UK could see the UK base rate as low as 4% by the end of the year, making buying foreign currency with Sterling more and more expensive.
As for hopes of a weakening Euro… Seems unlikely at the moment due to comments from Trichet suggesting that controlling inflationary pressures is still a key focus in Europe and there appears to be a greater likelihood of a rise in the European interest rate as opposed to a cut simply giving a more expensive Euro. Later this month the BOE will also be releasing the minutes from yesterdays meeting, this will show the numbers of members who voted for the hold, a cut or a hike and the release of this will surely increase volatility in the Pound exchange rate.
Take advantage of the volatility in the currency exchange markets while protecting yourself at the same time with a stop loss and limit order. If you have a future requirement, consider a forward, as further Sterling weakness could be on the cards.
To discuss your currency requirements or the services that we offer and how we can tailor our approach to meet your personal requirements, please contact Rob Jenner on +44 (0) 20 7989 0000 or email rtj@fcexchange.co.uk