As Inflation Rises So Does The Pound

The Pound has broadly gained since last week largely due to last week’s Bank of England inflation report on Wednesday. At the start of this week we touched the 1.18 levels against the Euro and have reached 1.60 against the US Dollar. With the amount of volatility that we have recently seen, it is worth considering booking a transfer or fixing a rate in advance for any GBP transfers into another currency. Last week’s inflation report addressed the rising levels of inflation which have made it increasingly likely that the Bank of England will make an interest rate rise sooner than was thought six months ago. Interest rate rises nearly always boost a currency as we have just seen with the Australian Dollar which reached parity with the American Dollar for the first time in years following a decision to raise interest rates in Australia. The downside of increasing inflation is that it raises questions over the ability of the Bank of England policy members to keep inflation below the 2 percent target as this has not been achieved. From a currency point of view however, markets tend to invest in currencies where the inflation pattern is showing a growing economy and higher interest rates, so it looks as though Sterling could strengthen on the back of this area. This Wednesday is shaping up to be the crucial day for the Pound with yet more insight into the Bank of England’s decision making when the policy minutes of the last meeting two weeks ago will be released at 10am. These have shown the ability to significantly move the markets over the last few months so it’s a good idea to speak to your broker and make sure you are watching what happens with the rates. If these further reinforce the fact that an interest rate rise is becoming increasingly likely they may push another rally – on the other hand if they significantly downplay the brighter GDP figures and other news they could bring along more uncertainty. The Euro has had its fair share of good news over the past week but due to the debt problems of the weaker nations, particularly Ireland, making headlines, the single currency has failed to respond. Positively increasing GDP figures from Europe, Germany and France at the tail end of last week for example have not given the Euro the boost they might have if sovereign debt was not haunting the Euro. An EU finance meeting begins today in which Ireland’s debt problem will be discussed. Although Ireland are adamant they do not need help from Europe to manage their debt, it is believed that the EU may force help to ensure the situation does not spiral and begin to affect other EU nations. Should it be announced that the EU are going provide rescue funds to Ireland at any time over the coming weeks, some weakening of the Euro might be expected. Now that the quantitative easing decision is done and dusted as far as markets are concerned, the US Dollar has had room to appreciate, particularly benefiting from Euro weakness. There have also been some surprisingly positive data releases such as retail sales and consumer sentiment. The Pound is still at some of the highest levels seen all year reaching above 1.60 against the US Dollar but there is a lot to play for this week with both the Bank of England minutes and US CPI inflation data on Wednesday.