Market News Detail

Pure FX - Foreign Exchange Market Commentary - June 2008

Sterling Overview

The Bank of England (BoE) is in a difficult position with inflation set to accelerate towards 4% in the coming months, and economic growth slowing.  Rising inflation would usually lead to the BoE increasing interest rates whilst they would normally be cut to stimulate economic growth.

However, it seems unlikely the BoE will do anything in the short term although continued inflationary pressure could mean higher rates are not far away.  With inflation rising, there is a risk the BoE’s Monetary Policy Committee (MPC) may be forced to raise interest rates sooner than they would like.  This is a big turnaround from a few months ago when the next move looked certain to be a cut. 

UK consumers seem immune to the pressure from rising inflation, higher mortgage borrowing costs and falling house prices.  Instead retail spending rose 3.5% in May to stand 8.1% higher in volume terms than in 2007.

Once again our view is that sterling will remain under pressure in the short term and probably for the next few months at least, although for more information please contact your Currency Dealer.

GBPEUR

European Central Bank (ECB) president Jean-Claude Trichet has hinted strongly that the ECB may hike interest rates at this Thursday’s meeting.  A 25 basis point rise has been priced into the market with some economists forecasting a further hike later this year, to cope with rising inflation.  In the short term the euro is likely to gain support from speculation of higher interest rates although weaker growth prospects could weigh on the currency further out and provide better buying levels for euro purchasers.

GBPUSD (Cable)

Recent economic data suggest the US is likely to avoid a technical recession in 2008, however significant risks remain to the outlook.  Whilst we expect the dollar to strengthen over the next 6-18 months, we do not expect it to stage a sustainable recovery until next year, when growth prospects should improve.  Signs of faster growth could lead to aggressive tightening in the US with the Fed raising interest rates, which would tend to strengthen the dollar.

GBPCAD (Loonie)

The Canadian dollar has lost some of the gains previously made against the pound, providing more favourable buying levels to loonie purchasers.  The Bank of Canada (BoC) kept interest rates on hold at 3% earlier this month; the last move was a 50 point reduction in April.

GBPZAR (South African rand)

The South African rand has weakened despite higher interest rates and commodity prices, suggesting factors beyond yield differentials are weighing on the currency.  This may relate to weaker economic growth prospects and the generalised rise seen in investor risk aversion.

GBPAUD (Australian dollar)

The Australian dollar rose to a 25yr high against the dollar and made ground against the pound on speculation that the Reserve Bank of Australia (RBA) will raise interest rates in the coming months, although rates were kept on hold at 7.25% earlier this month.

We hope this newsletter has been useful and for further information please contact your Pure FX Currency Dealer on +44 (0) 1494 671800