Sterling, US Dollar and Euro Exchange Rate: The Pound declined further against the Euro yesterday

Foreign Exchange Rates Currency News - The Pound declined further against the Euro yesterdayThe Euro rallied to a two month high against the Dollar and the Yen on speculation that EU finance ministers will meet today and approve a second round of financing for Greece.

Sterling / Euro and US Dollar exchange rates

The Pound declined further against the Euro yesterday, dropping under 1.20 to a low of 1.1906, ahead of the Bank of England interest rate announcement this lunchtime, with speculation that policy makers will sanction further quantitative easing. The single currency also rose to an eight week high versus the U.S Dollar, amid speculation that Greek officials are getting very close to an agreement on austerity measures needed to warrant a second bailout.

The UK currency also lost some momentum versus the U.S Dollar, as the prospect of further quantitative easing reduces demand for higher-yielding assets. The recent economic data in the UK has pointed to growth in services, manufacturing and construction in the past month and that may prevent the MPC from announcing an extension to the bond purchasing plan just yet.

The Pound was unable to sustain its momentum above 1.59 against the U.S Dollar and traded sharply lower through the course of the day with a test of support close to 1.58. The near-term Sterling direction will be strongly influenced by the extent of any additional bond purchasing and an aggressive stance would tend to trigger initial selling.

There were broadly supportive comments from Standard Poor’s, especially on the flexible exchange rate, which should help keep any rating cut fears at bay in the short-term. There is speculation this morning that the Bank of England will pump another £50 billion into the UK economy today, despite the recent improvement in UK PMI’s.

That would raise the target bond purchases to £325 billion, more than a quarter of current outstanding gilts. There is a chance of a bigger increase of £75 billion and the decision will be announced at midday in London. There is also economic data due for release today with industrial production data due for December and trade balance figures.

Euro / US Dollar exchange rates

The Euro rallied to a two month high against the Dollar and the Yen on speculation that EU finance ministers will meet today and approve a second round of financing for Greece, which would boost demand for European assets and support the Euro. The single currency was confined to narrower ranges, as technical factors tended to dominate.

Greek negotiations continue amid a series of rumours that a resolution is close to being agreed, but still nothing official. The Prime Minister Lucas Papedemos announced there was an outline deal on all aspects of the agreement except for pensions. Tensions will remain high today ahead of the ECB interest rate announcement and accompanying press conference.

The ECB will probably leave interest rates on hold at 1% but the comments from the Chairman Draghi will be closely watched for any hints of a rate cut, together with the commitment to bond purchases and long-term repo operations. There were no major U.S economic data releases through the course of the day, maintaining the focus on Fed comments about further quantitative easing.

Today’s Exchange Rate Data

U.K 09:30 – Industrial Production (December) – Manufacturing

U.K 09:30 – Trade Balance (December) – Non EU Trade

U.K 12:00 – BoE Interest Rate Announcement

EU 12:45 – ECB Interest Rate Announcement

EU 13:30 – ECB Press Conference

U.S 13:30 – Initial Jobless Claims (w/e 4th February)

U.S 15:00 – Wholesale Inventories (December)

U.K 15:00 – NIESR GDP Estimate (3 Mths to January)

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