Market News Detail

How will the latest measures affect foreign currency markets?

Sterling Overview

As expected the BoE (Bank of England) reduced interest rates by 50 basis points early February and many economists predict a further reduction of 25-50 basis points in the coming months.  The base rate is now at 1%, a new record low.   

RBS (Royal Bank of Scotland) announced the biggest loss in corporate history last week recording an annual loss of £24.1bn.  This was attributed by Chairman Philip Hampton to “unprecedented turbulence” in the finance markets.  The scale of the loss had been factored into the markets and although sterling weakened on the day this was mainly due to negative comments voiced by dovish MPC (Monetary Policy Committee) member David Blanchflower. 

Elsewhere Nationwide UK house prices slumped 1.8% in February, a record drop.  This equates to a year-on-year fall of 17.6% and raises the probability that house prices could face further declines throughout 2009.  The continuing fall in house prices has a direct link to mortgage lending and although lending increased in December it was £5.8bn down year-on-year, with mortgage approvals less than half. 

On a more positive note, both Northern Rock and RBS have agreed to lend billions of pounds over the next two years in mortgages and loans.  Whilst sterling is likely to remain under pressure in the short-term we are predicting a stronger pound towards the end of the year. 

For a more in-depth analysis please contact one of our Currency Dealers on +44 (0) 1494 671800.   

GBPEUR

With economic prospects in the euro zone deteriorating the ECB (European Central Bank) seems almost certain to cut interest rates in March.  However, according to some reports there is increasing pressure on the ECB to employ conventional measures, including asset purchases and quantitative easing (printing money).   Markets will watch closely and analyse comments from ECB members who are scheduled to speak at various events. 

GBPUSD (Cable)

Despite a series of negative economic data releases the US dollar has rallied against both the pound and euro.  Last week alone durable goods fell 5.2% for January, jobless claims soared to 667,000 and housing data released was very weak.  However this has only helped to strengthen the dollar as it has been viewed as a safe haven during these turbulent times although easing of this safe haven could put pressure on the dollar in the short-term.  The dollar was also boosted by President Obama’s economic plan to half US debt from $1.3 trillion using a series of measures. 

GBPCAD (Loonie)

The Bank of Canada chose to keep interest rates on hold at February’s meeting following a 50 basis point cut towards the end of January.  The base rate remains at 1%, the same as the UK. 

GBPZAR (South African rand)

The South African Reserve Bank reduced interest rates by 1% early February reducing the base rate to 10.5%.  We expect the rand to have a broad trading range in the short-term. 

GBPAUD (Australian dollar)

The Reserve Bank of Australia slashed interest rates a further 1% in February reducing the base rate to 3.5%.  Higher yielding currencies such as the Aussie dollar are likely to remain under most pressure as global interest rates fall, in fact the Australian dollar was one of the worst G10 performers against the US$ last month. 

GBPNZD (New Zealand dollar)

Interest rates remained at 3.5% in February although like the Australian the Kiwi dollar is also a higher yielding currency and therefore more likely to remain under pressure as global interest rates fall.  The New Zealand dollar was also among one of the worst G10 performers against the US$ last month.  

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.