Sterling fragile ahead of interest rate decision

Tom Tong08/Jun/2011Currency Updates

GBP

The pound gained against a broadly weak dollar on Tuesday, but went on to hit one month lows against the euro as weak data added to the view that softness in the economy will keep UK interest rates on hold for the foreseeable future.

The pound slipped against the euro as contrasting views on monetary policy decisions from the Bank of England and European Central Bank benefited the single currency. It is anticipated that the ECB will signal an imminent interest rate rise at a policy meeting on Thursday, whereas the BoE will remain dovish with rate rises unlikely in 2011. This would increase the euro’s rate differential versus the pound and may push it higher.

Meanwhile, a fall in UK retail sales and weak housing figures for last month underlined the fragility of Britain’s economy, which is holding the BoE back from raising rates even as inflation risks remain stubbornly high.

EUR

The euro hit one-month highs against the pound and dollar during Tuesday trading, helped in part by better-than-expected German factory data.

The common currency is being supported by expectations that Greece is likely to get a vital slice of aid in July to stave off default as policymakers hope to arrange a voluntary rollover of Greek debt. Additionally, the ECB raised rates in April and is expected to hint at another hike in July when it holds its next policy meeting on Thursday. The euro got a further boost on news that plans for a second bailout of Greece are taking shape, with a proposal for a three-year package worth 80 to 100 billion euros set to be ready in the next two weeks, Eurozone sources said on Tuesday.

USD

The dollar hit one month lows against a basket of currencies after Federal Reserve Chairman Ben Bernanke acknowledged that growth has slowed in the US, with interest rates set to stay low for the foreseeable future.

Bernanke’s comments came after a senior Chinese currency regulator repeated warnings about investing too heavily in dollar-denominated assets. In an article posted on the website of the China Finance 40 Forum, a Beijing-based think tank, Guan Tao said his country must be alert to the risk of holding too many dollars when Washington is pursuing loose monetary and fiscal policies. Any further downgrades in expectations could see the greenback lose further ground against its major counterparts.

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Written by Tom Tong

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