Fragility in euro zone sees sterling creep up

Published: 10 March, 2011

Sterling crept up against the euro yesterday after the euro's recent rally ran out of steam due to concerns over fragility in the euro zone.

Currency rates

EURO/GBP - 1.1672

US$/GBP - 1.6129
CHF/GBP - 1.5033
CAN$/GBP - 1.5640
AUS$/GBP - 1.6071
ZAR/GBP - 11.1200
JPY/GBP - 133.56
HKD/GBP - 12.567
NZD/GBP - 2.1949

SEK/GBP - 10.278
US$/EURO - 1.3818

The pound hit a high of €1.1671/£1 on the day and better than expected UK trade figures helped sterling push over $1.62/£1 against the US dollar. Data showed that the trade deficit for the previous month narrowed from £9.7bn to £7.1bn - nearly £1.5bn better than expected. This is good for the UK as it shows that more goods were exported than imported last month, meaning that more money is coming into the UK economy. The big release today is the Bank of England's interest rate decision. With uncertainty over the impact of higher oil prices, the bank is likely to keep rates on hold.

In the euro zone, the recent euro rally petered out yesterday as investors and analysts began to question the wisdom of an interest rate hike when the majority of the region is suffering from astronomic levels of debt. Whilst there is likely to be a rate rise in April which will keep the euro supported, in the medium term the euro is likely to suffer from fragility over the debt crisis - highlighted by a downgrade of Spain's debt by Moody's. The issue was essentially deferred until European finance ministers could decide on what to do, but nothing has happened on that front so the markets are likely to expect some kind of resolution.

In the USA, the US dollar slipped against sterling but is likely to remain within the range of $1.61-1.63 as traders buy on the low and sell on the high. Oil prices rose to over $116 per barrel as fighting intensified in Libya and reports emerged of several oil facilities coming under attack. Oil is the big issue - especially in the USA, and the outcome of the current crisis is likely to set the tone for the US economy for the next few months.

Elsewhere, overnight the Royal Bank of New Zealand unexpectedly slashed interest rates by 0.5% in order to pre-empt the economic fallout from the recent earthquake. Many were expecting an interest rate cut of 0.25%, with some even calling for rates to be kept on hold. This is a bold move by the bank, so call in now as the New Zealand dollar is likely to see some weakness.

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