High levels of inflation within a country are typically associated with the weakening of the value of that country’s currency against that of its trading partners. This is because any money invested in the currency is likely to lose value as interest levels cause the currency to depreciate. This lack of investment interest can cause exchange rates to drop. However, high levels of interest are often accompanied by high interest rates as well, which have the opposite effect – typically causing exchange rates to rise!
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UK Inflation jags lower to 3% unexpectedly
March 25th, 2010
- Image via Wikipedia
‘Sticky’ inflation for the UK looked as if it was ending yesterday as CPI fell unexpectedly, weakening the pound. The Consumer Price Index has been notably resilient throughout the downturn and before yesterday had surprised to the upside on no less than 16 out of the past 19 occasions.
This weighed on the pound pushing it below the 1.50 level against the US dollar and also losing ground against the euro.
Sterling was the only currency that the euro was able to gain against yesterday as further confusion over bailout packages for the Greeks continued. ‘Hybrid’ solutions involving tipping points and IMF involvement are more likely to increase pressure on the euro and other risky assets in the short term as uncertainty remains unsolved.
The focus shifts from the EU to the UK today as it is Budget day and this could just be the excuse that speculators needed to try and push the pound lower and test some tolerances. Any upward fiddling with tax levels are likely to be viewed as putting the UK at a competitive disadvantage against the rest of the world although the plan is to obviously reduce our fiscal deficit.
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Sterling ends the week on the back foot
March 22nd, 2010
Sterling finished the week in less than convincing fashion, giving up ground against most trading partners, as investors flowed out of risky currencies and equities over the day.
Early morning news from Lloyds banking group that it would be returning to profitability over the year sent UK and European banking stocks soaring, helping the pound to hold its own.
However, afternoon news that the Reserve Bank of India had raised interest rates surprised the market. In a slight reversal of the early week trend towards commodity linked currencies some profit taking was seen as investors flowed back into the dollar. Equities moved back from their high’s across the globe also
Looking ahead today the data calendar is light, however there is plenty of challenges for sterling over the week. Inflation figures arrive tomorrow, as do retail sales later in the week.
