Morning Currency Exchange Market Update - GBP/EUR Rate Improves on UK Inflation Figure and Continuing Eurozone Sovereign Debt Fears While USD Suffers

March 23, 2011 - Written by John Cameron

STORY LINK Morning Currency Exchange Market Update - GBP/EUR Rate Improves on UK Inflation Figure and Continuing Eurozone Sovereign Debt Fears While USD Suffers

The Pound Euro exchange rate (GBP/EUR) is 1.1541. The Euro Dollar exchange rate exchange rate (EUR/USD) is 1.4171.

The Euro has performed strongly against the other majors in recent sessions, with the EUR/USD rate rising to within half a cent of a 14-month high.

The single European currency has been buoyed by the decision of EU member states to beef up the European Financial Stability Fund, (EFSF), in the early part of this month. Futures markets continue to price in an ECB interest rate rise next month as a certainty, providing further support for the Euro.

However, the Euro’s bull-run is coming under threat due to political wranglings in Portugal. The debt-ridden Iberian nation has seen its bond spreads increase dramatically in recent months as investors turned away from Portuguese T-Bills in increasing numbers.

The Portuguese government is attempting to pass legislation to introduce unprecedented fiscal austerity measures which policy makers insist will rein in the nation’s budget deficit from its 2010 level of 7.3% of national GDP to 4.6% of GDP this year.

Portugal’s ruling party is currently struggling to garner sufficient support from opposition parties to pass the measures. If they fail in their aim, then it is likely Portugal will be forced to go to the EFSF for an emergency bail-out, causing severe downside for the Euro.

Turning to the Pound, GBP/EUR has continued to retrace from its 4 month low of 1.1413, following yesterday’s release of a higher-than-anticipated CPI inflation figure for February. With the Government’s headline measure of inflation now running at 4.4%, many analysts are questioning how long the Bank of England MPC can avoid raising interest rates by continuing to blame rising prices on ’external factors’. Further insight into the likelihood of a near-term UK rate rise will come with this morning’s release of the BoE Minutes from its March MPC Meeting.

UK Chancellor George Osborne will deliver his second Budget since the coalition came to power this afternoon. It has been billed as a ’budget for growth’, but doubt remains over the extent of funds Osborne will have at his disposal, following yesterday’s UK Public Sector Borrowing Requirement figure, which showed net borrowing of £11.8bn by the government last month, the highest ever February borrowing level by a UK government.

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