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By Alex Ellis

The Bank of England may need to take a more aggressive stance towards curbing the UK’s inflation figure following today’s Consumer Price Index figure today which showed inflation has risen to 4%. This has been attributed to the rising cost of food, the VAT increase to 20%, as well as oil prices which are now at their highest ever at £1.27 per litre according to the Office of National Statistics.

The majority of analysts are predicting that we will see an interest rate rise in the third quarter this should cause sterling exchange rates to improve vastly as high interest rates see investors get greater returns and therefore increases the likelihood of money being pumped into an economy.

Today’s figure has caused the pound to weaken slightly because although it showed that inflation had grown it was actually slightly lower than many investors were hoping. As discussed I still think that inflation will cause interest rates to rise but feel this will more likely be towards the summer months.

Tomorrow at 10:30 the Bank of England will announce their quarterly inflation report and this could cause some further movement in exchange rates as this will outline how the BoE view the long term future for inflationary figures. It would be wise to contact your currency broker around this time so as ensure that you are not caught out by any adverse movement.

Other data to watch out for:

• On Thursday at 07:00 we have Producer Price Index figures for Germany – these have been known to cause movement as Germany is seen as one of the economic super powers in Europe.
• Also on Thursday at 09:30 we have UK Retail Sales figures which again can cause large movements on the market, keep in close contact with your account manager around this time to ensure that you are well informed prior.

By Alex Ellis

Sterling has stumbled early morning even following better than expected UK retail sales figures for January; these figures were 2.3% better than they were the previous year. Although you would normally expect this to cause strength for the currency we have actually seen GBP exchange rates suffer since the market opened. This shows just how fragile the pound remains at present and how data which you would normally expect to show strength has now become unpredictable.

Sterling has gained over 3% in the last 2 weeks and this is still a good time to change sterling into euros. To put it into perspective on a £200,000 transfer this movement makes a difference of €7,560 and this continues to highlight the importance of following exchange rates. The easiest way to do this is to employ the services of a currency broker who can help to guide you through the process and outline any upcoming data which may impact the value of your exchange.

Later on today at 11:00 we have German Industrial Production figures due and these are expected to show an increase to 0.2% from last month’s contraction of 0.7%. This economic release is seen as a key indicator of strength in the manufacturing sector and therefore considered quite important to show the overall health of an economy.

On Thursday at 05:00 we have the GDP estimate for the UK and this is definitely one of the releases to watch out for as recent GDP figures were so weak they caused sterling to lose around 4% against the Euro; this equates to a difference of around £8000 if you were selling €200,000. At 11:00 we have the ECB monthly report and at 12:30 we have the Bank of England’s interest rate decision – all of these have the potential to cause large swings on the market so it is worth contacting your currency broker beforehand.

By Alex Ellis

  Sterling gained yesterday as improved UK manufacturing sector activity showed an increase which boosted speculation that the Bank of England will indeed raise interest rates at some point over this year. Data showed that PMI (purchasing managers index) which was predicted to come out in 57.9 was actually released as 62 in January and this was the highest reading since the survey began in 1992.

 This places the Bank of England in a very interesting predicament as they are reluctant to raise rates due to the fragile nature of the economy and the risk of damaging the recovery once interest rates do rise. Obviously high levels of interest rates make the cost of borrowing more expensive but a lot of household have increased debts due to the recession and credit crunch and therefore are in much more debt than they would be usually.

 How is Egypt influencing exchange rates?

 Political turmoil in Egypt is causing a storm on the financial markets as the price of crude oil rises above $100 per barrel; these are the highest levels since 2008, over the last few days many stocks and bonds in the developing nations are being sold off. The market is due to remain especially volatile during this period as it will become harder and harder to predict how each individual release will impact exchange rates.

 John Claude Trichet is due to speak at 11:30 (GMT) on Friday and this could help to shape the short term future for exchange rates for the GBP/EUR exchange rates, in the majority of cases he has a fairly positive outlook for the future of the economy and I would not be surprised to see the same here.

 In US news we have the US non-farm payrolls tomorrow at 13:30 these measures the number of US workers employed but doesn’t include the agricultural sector. This is seen as a very important economic release for the US and therefore one I would highlight as having the potential to influence the market.

By Alex Ellis

GBP exchange rate forecast 2011

UK GDP showed a contraction this morning as the sterling rally looks set to be well and truly over. The UK is now beginning to look like it is entering into a stage of stagflation; this is where both inflation and unemployment remain persistently high. Inflation is currently at 3.7% and therefore is way above the Bank of England’s target of 2% and looks set to rise even further in the coming months.

This is the problem facing the Bank of England, if they raise interest rates then they risk damaging the economic growth however if they don’t then inflation could quite easily spiral out of control. The MPC are still split on what policy to undertake: Andrew Sentance has been in favour of hiking the interest rates for some time now whereas Andrew Posen has been of the opinion that the best way to stimulate the economy is to continue the QE programme.

I personally think that this predicament will continue for the majority of the year and we will not see and interest rate hike until most likely the latter part of the year as this is when the economy will be much more balanced.

Other releases this week that could affect the exchange rates are Wednesday’s Bank of England minutes from their most recent meeting, in the past this has caused movement if any of the members vote for an interest rate hike or if there is any indication of an extension to the BoE QE programme.

Current Euro Exchange Rates

The Euro has now benefited from the weak UK retail sales data and the huge contraction in the UK GDP figure shown earlier this morning. All it will take is for the UK to have one more negative quarter of GDP and technically we are back in a double dipped recession. Consumer confidence is released at 10:00  (GMT) for the Euro zone and I would expect this figure to be extremely important as the debt crisis in the euro zone seems to have gone quiet and if there is confidence in an economy then investors will move into the currency causing Euro strength.

US Dollar Exchange Rate forecast

In US news there is an interest rate decision due at 19:15 (GMT) although it is somewhat unlikely that the FED will raise interest rates so soon, we are able to offer contract options which will protect your position outside of UK trading hours.

By Alex Ellis

Sterling lost strength today as unemployment in the UK rose by 49,000 to total 2.5 Million people now unemployed across the country, currently 1 in 5 16-24 year olds is out of work. Only recently the Insitute of Public Policy Research stated that they believe there will be a double dip of job losses as job cuts take their toll in the coming months. We are beginning to see the primary effects of the budget cuts as economic growth is starting to slow and job losses are increasing, this will surely only get worse as the cuts become more prominent.

Eurozone debt focus has now fallen on Belgium – previously not considered one of the Pigs of Europe, the economy has now become in the spotlight owing to growing debt concerns. Currently their debt equals a whole years worth of GDP and their banking sector is weak (they required a bailout in 2008/9) and are heavily weighed down by other countries debt, most notably Greece, Portugal and Ireland.

If this becomes important in the news over the coming weeks then I would expect that Euro exchange rates would weaken as a result and the pound would gain, however UK retail sales are due out on Friday and I would predict that this will cause weakness for the pound.