Pound/Euro rates fall on BoE Inflation report. Forecast.

Wednesday 14th November 2012 

Good afternoon everybody. It’s been quite a mixed week so far in the currency markets, with big swings in the Pound/Euro rate along with other currencies. As the week started, Sterling was at a 6 week high against the Euro, and things were looking very good for Euro buyers. As is often the case with sharp upward spikes however, it was not to last. By Wednesday, a dire report from the Bank of England took the wind out of the Pounds sails, and we saw GBP/EUR rates drop by over a point.

In today’s report I’m going to take a look at what caused the Pound to fall, and what the events in the EU may mean for rates going forward.

Sterling/Euro highs were not to last 

Sterling hit its best rates against the Euro in 6 weeks recently after the Bank of England left interest rates and the size of its bond-buying programme unchanged, as outlined in my last post. The decision had been broadly expected by most analysts after a great run of UK data.

However the gains were not to last, firstly due to a dire report from the Bank of England this morning, and fears over what effect the deepening EU crisis will have on the Pound. Let’s take a look at what the Bank of England governor said and what effect it had on Sterling.

Pound falls after BoE Inflation report 

This morning, Sir Mervyn King gave the latest Bank of England inflation report, and during this he has downgraded the growth forecast and warned the economy will be below pre-financial crisis levels for the next three years as it continues its recent "zig-zag'' pattern. The comments did not bode well for Sterling.

Often when Mervyn gives a speech he talks the Pound down, and today was no exception. He said that the Pound/Dollar rate had gained by 8% and the Pound/Euro rate by 12% in recent times, and that these gains were unsustainable. I think he is worried what effect the strong Pound will have on exports, and so purposefully caused some weakness to try and drive the economy.

In the report he said that the Bank of England expects GDP growth of just 1% in 2013, and also said that inflation would to fall back towards the Government's target of 2% in the latter part of next year.

“There seems a greater risk that the UK economy may be in a period of persistent low growth,” Sir Mervyn said. He added that the outlook for inflation was the main reason why the policymakers decided to stop the purchases of gilts - or quantitative easing - in November. There is a real chance more QE could be on the cards however in December or early next year, so those that need to buy Euros should seriously consider their position now.

EU fears could also affect Pound/Euro rates

Little sign of a recovery in the euro zone any time soon is likely to weigh on the single currency against sterling. Weakness across the board would normally cause GBP/EUR rates to rise, however there are real concerns about whether the UK's economic recovery can be sustained, given a deepening recession in the euro zone which is one of our key trading partner.

If the EU economy continues to struggle, then it’s going to affect the Pound and this could keep rates in check.

The Greek economy is doing very poorly. It shrank 7.2% in the third quarter compared with the same period a year earlier, and has now been in recession since late 2008. They’ve had 2 bailouts from the EU and IMF, and there will probably be more to come.

Eurozone finance ministers will meet next week to discuss releasing the latest 31.5bn euros as they seek agreement on how to make Greece's debt sustainable going into the next decade. In the shadow of all of this, workers across the European Union are staging a series of protests and strikes against rising unemployment and austerity measures. General strikes in Spain and Portugal have halted transport, businesses and schools, and led to clashes between police and protesters in Madrid. Smaller strikes were reported in Greece, Italy and Belgium, and rallies were planned in other countries.

Summary 

Many clients are convinced that the problems in EU will drive rates back towards the 4 years highs of €1.28 we saw in the summer. I don’t agree with this. These were the highest rates for years, and despite much better expected UK data we have failed to get back to them.

Rates have fallen further this week due to fears over the UK economy, so if I needed to buy Euros I would give serious consideration over what to do now. We are still trading comfortably above the 1.20 level, and this time last year rates were as low as 1.13. Holding out for more gains could easily mean you lose out.

A wise strategy in this climate would be to place a Stop Loss order. This is where you can instruct me to purchase your currency should it drop below a pre agreed level. For example, 1.22. You can then take a bit of a gamble on rates recovering, but have a safety net in place should rates fall. This is a good way to approach the current market, as it means you don’t lose out on all the recent gains and can still trade at a reasonable level.

If you're looking for the best exchange rates, or just want to have a chat about the options open to you, then send me a free enquiry by clicking below. There is no cost or obligation involved, and you could be very surprised on how much you can save through the commercial rates I can source for my clients.  
 
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Source | Foreign Exchange Rate Forecasts | http://foremostcurrencygroup.blogspot.com/2012/11/poundeuro-rates-fall-on-boe-inflation.html

India Leaves Rates Unchanged on Inflation Concerns

India’s central bank kept borrowing costs unchanged, signaling an end to its deepest round of interest-rate cuts on concern that inflation will “creep up” from October.
The Reserve Bank of India held its reverse repurchase rate at 3.25 percent, according to a statement in Mumbai today. The central bank raised its inflation forecast for the year to March 31 to “around 5 percent” from an April estimate of 4 percent, citing “elevated” food and commodity prices.
Inflation risks increased after Finance Minister Pranab Mukherjee this month unveiled plans to raise spending and widen the budget deficit to a 16-year high to bolster growth. Policy makers from Tokyo to London, who in some cases cut interest rates to close to zero, have started to discuss when they will exit from the emergency measures put in place to ease a global credit freeze.
“Central banks need to put in place now a timely, smooth and systematic exit from the monetary easing,” said Siddhartha Sanyal, an economist at Edelweiss Capital Ltd. in Mumbai. “For India, it would be difficult to continue pursuing the current low-rate regime beyond six to nine months.”
Stocks narrowed losses after the central bank decision, which was expected by 20 of 23 economists in a survey. The Sensitive stock index fell 0.4 percent to 15,312.63 on the Bombay Stock Exchange at 11:20 a.m. The benchmark 10-year government bond yields rose 1 basis point to 6.96 percent while the rupee was little changed at 48.225 against the dollar.
Consumer Prices
India, which releases final inflation numbers after a two- month lag, raised its estimate for the benchmark wholesale price index in the week ended May 16 to 1.65 percent from 0.61 percent, indicating that price gains are gathering pace.
Consumer price indexes that measure the cost of living for industrial and farm workers were running at between 7 percent and 10 percent in May, driven by high food costs.
“The continuation of the monetary-fiscal stimuli is now hitting the danger zone,” S. S. Tarapore, a former deputy governor of the central bank, said in Mumbai on July 16. “Given the budget is strongly expansionary, the RBI has little option but to gradually withdraw the monetary accommodation.”
Mukherjee on July 6 announced plans to borrow a record 4.51 trillion rupees ( billion) to fund spending on roads, power and aid for the poor. The budget shortfall is forecast at 6.8 percent of GDP in the year to March 2010.
‘Immediate Challenge’
The central bank today estimated its policy measures since September including lower interest rates and a reduced cash reserve ratio were worth 6 trillion rupees. It said a prolonged budget deficit can “crowd out” private investments and trigger inflation, and urged the government to lay out a roadmap to trim the budget shortfall, including details on revenue and expenditure targets.
The “immediate challenge” before the central bank is to provide ample cash in the banking system for companies and government borrowings to support growth, while at the same time control the “potential build-up of inflationary pressures on the way forward,” Subbarao said in today’s statement.
“In the din created in the name of growth, the RBI has to realize that if inflation accelerates, the blame will rest squarely on it,” Tarapore said.
The Organization for Economic Cooperation and Development said June 24 that GDP in its 30 industrialized member countries will increase 0.7 percent next year after shrinking 4.1 percent in 2009. The U.K. inflation rate will be the highest in the G-7 next year, OECD said.
Growth Forecast
Subbarao today also raised the central bank’s growth forecast for India in the year to March 2010 to 6 percent “with an upward bias” from the 6 percent estimated in April because of favorable funding conditions for companies and a revival in industrial production.
He said an “uptrend in growth momentum” is unlikely before September and that less-than-adequate monsoonal rainfall could reduce farm output. The rains, which start in June and last until September, were 17 percent deficient as of July 24.
India’s .2 trillion economy, Asia’s third-largest, expanded 6.7 percent in the year ended March 31, the weakest since 2003.
Subbarao also backed Mukherjee’s goal to boost growth to a 9 percent pace each year and sustain that momentum to cut poverty in the South Asian nation.
Fiscal Stimulus
The finance minister said July 14 that the monetary and fiscal stimulus measures have shown positive results, though the economy is still “not out of the woods.”
Reliance Industries Ltd., India’s most valuable company, on July 24 reported an 11 percent fall in net income in the three months to June 30 as the global recession curbed fuel demand.
Saumitra Chaudhuri, a member of the planning agency that sets India’s development agenda, said formulating monetary policy for the next three to six months will be difficult, as it will be hard to decide when rates should be increased to check inflation.
“Demand isn’t so strong. Inflation has picked up a head of steam -- though it’s not alarming, it certainly can’t be ignored,” said Chaudhuri, a former adviser to Prime Minister Manmohan Singh. “At this point to try and switch to a tighter policy may not be prudent.”
Subbarao said the central bank will maintain an “accommodative monetary stance” until there are “definite and robust” signs of recovery.
“This accommodative monetary stance is, however, not the steady state stance,” Subbarao said. “On the way forward, the Reserve Bank will have to reverse the expansionary measures to subdue inflationary pressures while preserving the growth momentum.”

Source | Forex News | http://forexnews-4all.blogspot.com/2009/07/india-leaves-rates-unchanged-on.html