Foreign Currency Exchange Rate Forecast – The Pound declined against the Euro and the U.S Dollar


by Adam Solomon

Sterling / Euro and US Dollar

The Pound declined against the Euro exchange rate and the U.S Dollar exchange rate yesterday, as investors scaled back expectations of when the Bank of England will raise interest rates ahead of the latest inflation report this morning. The UK currency traded within one cent of the lowest level against the Dollar since early April, despite speculation that the report this morning will show that inflation accelerated last month.

The minutes from the Bank of England’s last policy setting meeting will also be released tomorrow and will show how policy makers voted as they left interest rates on hold at a record low of 0.5%. A report out yesterday showed that home sellers raised asking prices to the highest level since 2008 but the recent economic data points to the simple fact that the UK economy is struggling to gain momentum, after modest growth in the first quarter.

Three of the Bank of England’s nine policy makers voted for a rate increase in April, although one of the members Andrew Sentance has now left the committee. One member called for an increase in the Bank’s asset purchase program from the current £200 billion, while the remaining majority opted to continue the ‘wait-and-see’ approach.

The Bank of England face a difficult balancing over the coming months in keeping inflation contained amid very weak growth activity. The Pound depreciated over 1% against the U.S Dollar last week following the negative economic data released in the UK and sank back towards 1.1450, losing 0.5% on the day yesterday.

UK consumer prices are expected to rise 4.1% year-on-year in April, up marginally from the previous month, but the result is not expected to alter expectations of when the Bank of England will lift interest rates. The governor Mervyn King conceded earlier this month that inflation remains “uncomfortably high,” as central bank officials indicated they may raise rates towards year-end even as the economy struggles to gain momentum.

There will be increased fears that the government’s budget targets will not be met and that will tend to undermine confidence in the Pound. The UK currency is still gaining protection from a fundamental lack of confidence in the major currencies with the Euro undermined by debt woes and the U.S embroiled in the debt limit debate.

Euro / US Dollar

The Euro gained from the lowest level against the U.S Dollar in almost seven weeks yesterday, as EU finance ministers tackled the nation’s sovereign debt crisis with Greece drifting towards default. Ministers backed a bailout for Portugal even as they stepped up the pressure on Greece to do more with an improved aid package.

The Dollar declined against the majority of the 16 most actively traded currencies, after manufacturing in the New York state slumped. The Euro found support below 1.41 against the Dollar yesterday and advanced through the course of the day with a peak at 1.4250. There was technical support for the single currency given that it was over-sold following the sharp losses over the past week.

The Euro-zone inflation rate was confirmed at 2.8% for April and there will be further speculation that the ECB will look to increase interest rates again over the Summer, particularly considering robust growth in France and Germany. The Dollar may gain amid renewed selling pressure on commodities and overall pessimism towards risk.

Today’s Data

U.K 09:30 – DCLG House Prices (March)

U.K 09:30 – Consumer Price Index (April) – RPI

GER 10:00 – ZEW Index (May)

U.S 13:30 – Housing Starts (April)

U.S 14:15 – Industrial Production (April)

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