Foreign Exchange Insight : GBP EUR Rate Drops In Spite of Acceleration in UK Inflation and Ongoing Greek Default Fears

September 14, 2011 - Written by John Cameron

STORY LINK Foreign Exchange Insight : GBP EUR Rate Drops In Spite of Acceleration in UK Inflation and Ongoing Greek Default Fears

The Pound Dollar exchange rate (GBP USD) is 1.5755. The Pound Euro exchange rate (GBP EUR) is 1.1553. The Pound Australian Dollar exchange rate (GBP AUD) is 1.5424.

The Euro clawed back some of the ground it lost against the Pound and the US Dollar at the start of the week during yesterday’s session.

Sentiment towards the Eurozone’s single currency improved throughout yesterday’s session thanks, in part, to soothing comments from German Chancellor Angela Merkel. Merkel used a German radio interview to re-affirm Germany’s commitment to Greece, stating that ‘everything must be done to keep the Eurozone together politically’ and warning of the detrimental effects that an ‘uncontrolled insolvency’ in the debt-addled Hellenic state would have on neighbouring countries.

Although Merkel’s words appeared to strike the right tone, the mere fact that she was openly discussing the possibility of a disorderly default by Greece raised alarm bells for investors holding Greek assets. In spite of this, the GBP EUR rate continued to trend downwards from Monday’s 6-month high of 1.1724 to trade down to 1.1513 late yesterday.

Elsewhere, UK CPI inflation data showed that UK price rises accelerated last month. August’s CPI figure came in at 4.5% versus July’s 4.4% reading, much as analysts had anticipated. This figure re-enforced the turnaround in relative yield expectations for the UK and Eurozone which last week’s dovish comments from ECB President Jean-Claude Trichet had instigated.

Last Thursday’s post ECB-rate decision press conference from Trichet was so downbeat on Eurozone growth prospects and relaxed on European inflationary pressures that many commentators surmised that an ECB rate cut might be on the cards. With UK price increases remaining persistently high, there is definite potential that the Eurozone’s current 1% yield advantage over the UK may be eroded at some stage in the next 12 months. With this in mind, a re-visiting of the 1.2000 level on the GBP EUR rate, which was last seen in January, 2011, can not be ruled out in the short-to-medium term.


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