Sterling drops as Bank of England report talks down UK recovery

Sterling has begun an instant drop this morning as The Bank of England quarterly inflation report comments on the recent flurry of negative UK economic data and gives a poorer outlook for growth and inflation into 2011. Sterling was trading at the mid market rate of 1. 1.5690 against the US Dollar and 1.2043 against the Euro at 10.50 am this morning.

Pound Sterling – UK Markets

It’s an important day for Sterling with a large amount of data releases and the Bank of England quarterly inflation report and the currency has begun to drop this morning. This morning has seen the unemployment rate for June come in unchanged at 7.8 percent, average earnings slightly higher than forecast and the claimant counts as poorer than expected with no improvement in July from the previous month. Added to this mixed bag is the Bank of England inflation report in progress this morning. Although the report has acknowledged that the recovery has continued in the UK it has also focused on the fact that economic activity is still well below its pre-crisis peak with significant risks to growth. Inflation forecasts have been revised upwards following the failure of inflation levels to stay within the 2 percent target and this is now expected to continue until the end of 2011. The plan to maintain interest rates at 0.5 percent was also confirmed which is likely to dampen any predictions of high levels of UK growth which have been revised downwards. Straight talking from Bank of England Governor Mervyn King on the UK economy tends to have a negative impact on the Pound which has shown itself again so far this morning. It is therefore advisable to speak with your broker today for any upcoming transfers involving Sterling to find the best way to protect yourself from volatility.

US Dollar – US Markets

The US Dollar has gained on the Euro since yesterday and shown volatility against the Pound. As expected, yesterday’s Federal Reserve meeting resulted in a statement that warned that the US economic recovery was progressing more modestly than previous expected. It referred to weak investment in commercial property and the reluctance of employers to add to payrolls. Also as expected, the low interest rate of 0.25 percent was also held with no change. The extent of the decision on stimulus measures was the outcome that analysts were less sure of in predictions. Although the Federal Reserve hasn’t pledged to expand the ‘quantitative easing scheme’, it has confirmed the maintenance of the stimulus spending programme. It will maintain holdings of securities to prevent money from draining out of the system by reinvesting mortgage assets it holds into long-term Treasuries. Later today sees mortgage application data and the monthly budget statement. There is also trade balance data for June which is expected to show a deficit of $42.1 billion.

Euro – European Markets

The Euro has fallen in response to the unwillingness of investors to take risks following the US Federal Reserve’s meeting casting light onto the fragility of major economies. The Euro is therefore one of the major currencies suffering from large investors moving money over to the Japanese Yen as a safe haven.

Other Currencies – Highlights

The Japanese Yen has strengthened against all of its counterparts following the US Federal Reserve meeting. The currency has therefore managed to shrug off the internal poor data of machine orders coming in less than forecast but gain on its status as a safe haven. For a live quote or to tell us about your foreign exchange requirements, please call us on +44 (0)20 7740 0000.