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Pound Euro Insight - GBP EUR Exchange Rate Could Head Higher as S&P Downgrades Belgium?s Credit Rating

November 28, 2011 - Written by Frank Davies

The Pound Euro exchange rate (GBP EUR) is 1.1662. The Pound Dollar exchange rate (GBP USD) is 1.5502. The Pound Australian Dollar exchange rate (GBP AUD) is 1.5749.

With UK interest rates running at a record-low of 0.50% and the Bank of England having already committed £275bn to its quantitative easing scheme, there appear to be few avenues left open to policy makers in order to achieve the aim of getting British retail banks to lend money again.

To this end, reports suggest that UK Chancellor of the Exchequer, George Osborne, will use tomorrow’s Autumn Statement to announce details of a new ’Credit Easing’ policy by the British government. Rumours suggest that the scheme would see the government underwrite up to £40bn of loans from retail banks to British businesses.

Critics have suggested that the scheme will see the rate of interest paid on existing loans dip by around 1%, but may not lead to a significant volume of new loans being generated.

The last time the scheme was mooted, the Pound failed to gain any meaningful support in the currency market. It appears likely that tomorrow’s announcement will have the same ‘damp squib’ effect for Sterling.

Elsewhere, last week ended on a sour note for the Euro as Italy was forced to pay astronomical rates of interest on its short-term government bonds. Friday’s Italian debt auction saw the yield on Italian bills reach 6.504%, compared to a level of 3.535% at the last auction of 6 month Italian bonds at the end of October. Italy’s debt situation appears to be rapidly spiralling out of control.

There was more bad news for the Euro over the weekend when leading ratings agency, Standard & Poors, downgraded Belgium’s credit rating by one notch from AA+ to AA. Belgium has so far flown under the radar during the Eurozone’s sovereign debt crisis. The fact that S&P is now expressing concern about the Belgian government’s ability to service its debt is extremely bad news for Europe’s single currency.

Mounting problems for the Eurozone could see the GBP EUR exchange rate make a renewed run at its 8-month high of 1.1785, which it touched off earlier this month, at some stage during this week’s session.

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