Foreign Exchange Report : GBP EUR Rate Tumbles as Eurozone Producer Price Data Reduces ECB?s Scope to Cut Interest Rates Tomorrow

Published: Wednesday, 5 October 2011 08:19 BST - Written by John Cameron

STORY LINK Foreign Exchange Report : GBP EUR Rate Tumbles as Eurozone Producer Price Data Reduces ECB?s Scope to Cut Interest Rates Tomorrow

The Pound Euro exchange rate (GBP EUR) is 1.1587. The Pound Dollar exchange rate (GBP USD) is 1.5439. The Pound Australian Dollar exchange rate (GBP AUD) is 1.6146.

Yesterday’s session in the currency markets was marked by an unexpected strengthening of the Euro against the Pound. Europe’s single currency had come under severe selling pressure in early trading this week as investors feared the worst for Greece’s debt situation. This saw the GBP EUR rate spiral to within 2 pips of a 7-month high at 1.1722 on Monday. However, this level was convincingly rejected yesterday, sending the GBP EUR rate tumbling by over 1.5c to 1.1565 overnight.

This move may in part have been technical rather than fundamental, with speculators closing their Euro-sell positions as the single currency approached its weakest level against the Pound since the start of March.

However, support for the Euro on the day was undoubtedly driven by economic fundamentals as well, with the whole-of-Eurozone Producer Price Index data for September outstripping expectations, suggesting that ECB policy-makers will have little scope to consider a rumoured interest rate cut at tomorrow’s policy meeting. Meanwhile, on the other side of the coin, the UK’s PMI Construction survey for September printed at a lower-than-anticipated 50.1, showing that Britain’s construction sector avoided a monthly contraction by the slimmest possible margin last month.

The Euro has held on to its gains against the Pound in early trading today, in spite of leading ratings agency Moody’s overnight downgrading of Italy’s sovereign debt from Aa2 to Aa2. In its accompanying statement, Moody’s made it clear that the action was as much a general comment on their faith in European national debts in general, stating that their action was due to concerns over the, "material increase in long-term funding risks for the euro area",

Meanwhile, Ben Bernanke, the Chairman of the Federal Reserve, made another gloomy assessment of the US economy’s prospects when he addressed the US Congress late yesterday. Bernanke stated that the world’s largest economy is “close to faltering” and called for direct action to be taken. This could see support for the Greenback during today’s session, with the potential or the GBP USD rate to make a run at its 13-month low of 1.5327 if market participants once again decide to batten down the hatches and scale back on riskier investments.


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