Foreign Exchange Insight : Swiss Franc Tumbles on Euro-Peg Rumours, While GBP is Friendless Ahead of UK Inflation Figure

August 16, 2011 - Written by John Cameron

STORY LINK Foreign Exchange Insight : Swiss Franc Tumbles on Euro-Peg Rumours, While GBP is Friendless Ahead of UK Inflation Figure

The Pound Euro exchange rate (GBP EUR) is 1.1360. The Pound Dollar exchange rate (GBP USD) is 1.6335. The Pound Australian Dollar exchange rate (GBP AUD) is 1.5677.

The Pound started the week on the back foot yesterday, performing anaemically against all of the major currencies, with the exception of the traditional reserve currencies, (USD, CHF, JPY), which lost further ground as global stocks improved.

The Pound remains at risk of further selling pressure following Chancellor of the Exchequer George Osborne’s comments of last week which predicted that the UK recovery would be more difficult and prolonged than had previously been anticipated.

The lack of appetite for Sterling-denominated assets is illustrated by UK bond yields, which have dropped to their lowest level in history, (allowing for inflation), this week. If this morning’s headline UK CPI inflation figure for July fails to show an increase from the previous month’s annualised 4.2% level, then the Pound is likely to come under further selling pressure.

Meanwhile, the Euro gained support during yesterday’s session ahead of today’s discussions between German Chancellor Angela Merkel and French President Nicolas Sarkozy. The meeting has been called to discuss Europe’s debt problems and the market is encouraged by the ongoing commitment by the leaders of the Eurozone’s two predominant economies to tackle these problems head-on. Positive sentiment towards the Euro saw the GBP EUR rate further retrace from this month’s high of 1.1569 to trade close to 1.1300 overnight.

Elsewhere, the safe-haven Swiss Franc continued to plummet on the currency markets yesterday, with the GBP CHF rate briefly trading back above 1.3000 during last night’s Asian session, having hit its lowest ever level of 1.1467 last Tuesday. This massive rejection of the record low is partly attributable to a sea-change in global appetite for risk over the past week, but is largely due to the Swiss National Bank’s direct intervention into the currency markets - the SNB has sold massive quantities of Francs in the last seven days in order to weaken the CHF and buoy domestic exports.

Rumours emerged yesterday that the SNB was set to peg the Franc against the Euro at a target rate of EUR CHF 1.10 for a limited period of time in order to avoid further sudden strengthening for the Swissie if share markets go lower again. These market whispers caused investors to desert the Franc in their droves.


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