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Foreign Exchange Update : GBP EUR Rate Falls Further as Eurozone PPI Figure Stokes Inflation Expactations

June 7, 2011 - Written by John Cameron

The Pound Euro exchange rate (GBP EUR) is 1.1198. The Pound Dollar exchange rate (GBP USD) is 1.6355. The Pound Australian Dollar exchange rate (GBP AUD) is 1.5294.

Yesterday saw the Euro’s near-term strengthening continue following higher than expected whole-of-Eurozone Producer Price Index numbers.

The PPI Index, which is considered by analysts to be a leading indicator of inflation, showed that factory input prices across Europe rose by an annualised 6.7% in April, ahead of expectations of a 6.6% increase.

The PPI figure has re-focussed the markets on a likely ECB interest rate hike before the end of the Summer. The possibility of a Eurozone rate hike was heightened by comments made by an official German Government Spokesman, Steffen Seibert, who revealed that German Chancellor Angela Merkel told US President Barack Obama that the Eurozone would ‘master’ its current sovereign debt crisis, when the pair met recently.

However, on a less Euro-positive note, Seibert went on to state that Germany’s contribution to a second Greek bail-out, “must be decided by German authorities," and not by the Eurogroup.

In spite of the Eurozone PPI figure and Germany’s apparent confidence that Europe can contain its current debt situation, expectations for an ECB interest rate rise later this week remain very low, with the futures market going as far as to price the percentage chance of an ECB hike on Thursday at zero.

Elsewhere, the IMF yesterday downgraded its 2011 growth forecast for the UK economy from 1.7% to 1.5%, although it did broadly endorse the UK government’s self-imposed austerity measures.

Further bad news for the beleaguered Pound came in the form of last night’s British Retail Consortium’s UK Retail Sales figures for May, which showed that British same-store shop sales contracted by an annualised 2.1%, further limiting the Bank of England’s scope to raise UK interest rates.

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