Pound euro exchange rate rally continues, investors growing increasingly nervous about the EUR's future

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Published on Thursday, 09 August 2012 09:12

Written by Rob Samson

International Money Transfers at our sister site

"As Spain and Italy’s borrowing costs remain elevated and there’s no end in sight for the battle to reduce debt, investors seem to grow increasingly nervous about euro’s future" - Simon Denham at Capital Spreads.

The pound to euro is 0.14 pct up on yesterday's closing level as investors back sterling after Mervyn King dismissed another UK interest rate cut as counterproductive.

The sterling rally has been across the board.


"The BoE’s Quarterly Inflation Report slashed growth forecasts for 2012 to 0.0%, whilst predicting a return to 1.9% growth in 2013. The slash in growth projections was expected but King held to his position that UK growth is not as bad as recent headline data has suggested. Importantly, the BoE sees the balance of risks to UK inflation as broadly equal in both directions, which suggests that despite weak UK growth the central bank is no closer to introducing more QE," says Richard Driver at Caxton Fx.

Also driving this currency pair is the fact that the nerves concerning the euro's future persist.

"As Spain and Italy’s borrowing costs remain elevated and there’s no end in sight for the battle to reduce debt, investors seem to grow increasingly nervous about euro’s future.  It’s true the signs of sluggishness in the global economic growth do not help either.  As a result, it is little surprise the euro was under pressure again yesterday, losing 34 pips overall to 1.2362. (This vs USD).  This morning the focus has been on Chinese industrial production and retail sales figures which have been released just below expectations, so as yet haven’t caused a mad rush of selling," says Simon Denham at Capital Spreads.

Sterling is trading back up towards the top of its trading range against the US dollar, though upside from here looks limited.

GBP/USD is approaching the top of its two-month trading range up at $1.57. The BoE’s Quarterly Inflation Report gave this pair its latest push higher. Ahead of Tuesday’s manufacturing and industrial production data and a dovish Inflation Report, sterling was looking very vulnerable indeed. Both events provided upside surprises for the pound but they don’t change our outlook for a stronger dollar.

"Sterling is likely to meet plenty of resistance at current levels close to $1.57, so downward correction should be just around the corner," warns Driver.