Sterling Overview

The Bank of England has a tough task to steer the UK economy through these choppy waters. This month the Monetary Policy Committee (MPC) felt that despite high inflation, interest rates should remain at 5%. The minutes of the meeting show this was not a straight forward decision, with one member voting for an immediate cut in the base rate and another voting for an increase. This split in sentiment is down to the fact that inflation remains stubbornly high, primarily due to high energy and food prices, hence the call for a rise. However the economy is slowing, so one member of the MPC voted for a cut to stimulate growth.

On balance despite numerous media reports of gloom the majority of economic indicators show the UK is slowing in line with forecast. With this in mind over the last few weeks we have seen sterling remain resilient against most currencies, and whilst markets are still quite volatile the pound seems to have found support. Well, for the moment at least.

In the short term our view is that sterling will remain under pressure and probably for the next few months. Clearly for more detailed information please contact your Currency Dealer.

GBPEUR

In our commentary last month we said the European Central Bank (ECB) may raise interest rates following President Jean-Claude Trichet aggressive stance towards inflation. We can now confirm the ECB have raised rates 25 basis points to 4.25%. Normally when interest rates are increased the currency appreciates in value, however for most of July we have seen the euro under pressure. This is due to the fact that most recent data from the eurozone suggests the credit crunch and global inflation is finally having an affect.

GBPUSD (Cable)

Whilst financial markets are still coming to terms with the rescue of the largest mortgage lenders Freddie Mac and Fannie Mae the US dollar remains under pressure. However analysts expect Q2 GDP to show the US economy rebounding with consumer confidence resilient. Therefore it is highly unlikely the Fed will cut interest rates, and as the economy recovers they will probably begin to raise rates in order to curb inflation pressures. This will tend to support the dollar and make it more expensive.

GBPCAD (Loonie)

The Canadian central bank surprised the markets by increasing interest rates last month, this along with high oil prices has seen the dollar remain expensive. However, these gains are beginning to be eroded since oil prices have fallen from record highs earlier in July.

GBPZAR (South African rand)

Pressure remains on the rand as markets attempt to establish medium term economic prospects. Some speculators are forecasting robust growth, however the rand is one of the more volatile currencies so we expect quite large movements in the exchange rate.

GBPAUD (Australian dollar)

Although the RBA kept interest rates on hold in their latest meeting, expectations are for economic tightening. However, the Australian dollar tends to follow commodity prices and with a correction in these markets we could see the dollar come under pressure.

GBPNZD (New Zealand dollar)

The markets were not expecting any change in interest rates. So following Julys cut of 25 points to 8.00% the New Zealand dollar has been under pressure and lost value against sterling.

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

Nothing in the newsletter should be construed as advice or guidance as to when to buy or sell currency..