Welcome to the Pure FX account of the latest changes in the foreign exchange rates.
This is intended as a brief guide to movements in the exchange rates overnight, to put you in the best position for when you change currencies.
Sometimes, just sometimes, the foreign exchange market is really good at finding the silver lining in things.
The pound climbed across the board last night, including taking almost a full cent from the euro, as the Bank of England hinted it would not cut interest rates below 0.5%, even as it slashed its UK growth forecast to 0.0% for 2012.
Speaking at its Quarterly Inflation Report, BoE governor Mervyn King said cutting interest rates would be “counter-productive” at this stage, because it would prevent high street banks making a profit on new loans. Given that lending to businesses desperately needs to rise to spur growth, this would hence be the last thing the BoE wants to discourage.
Of course, from the point of view of the pound, interest rates stable at 0.5% (as opposed to 0.0%, say) increases the likelihood of investors getting a higher return on UK investments. This hence explains the pound’s rise. It also helped that Mr. King’s hint came as something of a surprise to the markets. As Michael Sneyd, foreign currency analyst at BNP Paribas, notes: “Ahead of the inflation report, the market had been pricing around an 80 per cent probability of a rate cut by November.”
That aside though, the forecast for the UK is not so upbeat at present. As I mention, the Bank of England cut its growth forecast to 0.0% for this year, down from 0.7% three months ago. It also cut its forecasts for 2013-14 expansion. As Mr. King noted in his press conference, “underlying growth will probably remain soft in the near term.”
This reflects as much the uncertainty stemming from the Eurozone crisis, as the productive capacity in the UK economists now fear was destroyed in the financial crash. Hence, if this downbeat forecast is reflected in future data, the pound could lose out.
What’s coming up next?
The monthly UK trade balance is released today. If this reveals a reduction in the trade deficit (i.e. how much imports exceed exports) the pound could be in for a boost. It would be especially promising to see exports to emerging markets rising, as these present the best growth opportunities (as opposed to the stagnant Eurozone.)
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