Market News Detail

Will low interest rates affect currency markets?

Sterling Overview

Writing these reports does sometimes feel like déjà vu in the sense that the Bank of England (BoE) made history again last month. This time cutting the base rate by 50bps to 1.5%, which is the lowest level since the Bank was established 315 years ago. BoE Governor Mervyn King said that now the UK is officially in recession, after Q4 2008 GDP showed a 1.5% contraction, we are likely to see more economic stimulus. Although we are not expecting the Monetary Policy Committee to reduce interest rates much more than 50-75bps. 

Generally speaking the Bank of England have been largely supported by the City, which is welcoming the various measures being announced to free up credit markets. This is in contrast to a few months ago when many analysts were calling for the Bank to be more proactive in their approach to the global credit crunch. It goes without saying that much of the economic data being released in the UK is poor, however what does antagonise me a little is the media’s continuous appetite for sensationalising bad news. I am not talking about “spin” but in my view it would be nice to have more balanced / objective reporting. 

Whilst I do not want to sound repetitive it is likely sterling will remain under pressure in the short term. Our medium term outlook hasn’t changed much and we expect sterling to recover once economic data begins to improve. As always for a more detailed opinion please contact us directly. 

GBPEUR

The impact of cutting interest rates would normally weaken a currency, but markets were expecting a cut in UK interest rates and since hitting an all time low on New Years Eve sterling has gained about 12% on the euro. Unlike the Bank of England, the European Central Bank (ECB) has been slower to react to the credit crunch. Only time will tell what impact this will have but many analysts suggest the recession in Eurozone will be longer, albeit not as deep so are expecting the euro to lose value. 

GBPUSD (Cable)

All leading economic indictors in the US point towards negative growth for 2009. Unemployment reached a 15 year high of 7.2% and Q4 2008 GDP contracted by 3.8% on an annualised basis. It would not be unreasonable to expect dollar weakness. However massive fiscal stimulus packages, near zero interest rates and continued expansion of Government spending will support the economy and therefore the US dollar in short term. 

GBPCAD (Loonie)

After further reductions in official interest rates and rising unemployment the loonie is expected to come under pressure. However pressure is likely to be from US dollar only as appetite for sterling is very limited. 

GBPZAR (South African rand)

With general trend for risk aversion and a move back to quality, emerging currencies like the South African rand are likely to come under pressure. Furthermore analysts are expecting a 100bps reduction in interest rates as output falls alongside world economies. 

GBPAUD (Australian dollar)

Despite massive cuts in interest rates by the Reserve Bank of Australia, recent Government data shows house prices falling sharply. Analysts have priced in another 100bps cut, which in the short-term could have a negative impact for the value of Australian dollar. 

GBPNZD (New Zealand dollar)

According to the New Zealand Treasury department the economy will remain in recession until at least Q2 2009 and the worsening global outlook could make for a steeper slowdown.
This coupled with a 150bps cut in interest rates the kiwi dollar has come under intense selling pressure recently. 

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.