Sterling strengthens against euro and US dollar

Published: 19 April, 2011

Sterling strengthened against both the euro and US dollar yesterday as a US credit rating outlook downgrade damaged the US dollar and fears over Greek sovereign debt hurt the euro.

Currency rates - April 19

EURO/GBP - 1.1402

US$/GBP - 1.6257
CHF/GBP - 1.4568
CAN$/GBP - 1.5669
AUS$/GBP - 1.5520
ZAR/GBP - 11.1273
JPY/GBP - 134.154
HKD/GBP - 12.6484
NZD/GBP - 2.0656

SEK/GBP - 10.1894
US$/EURO - 1.4258

Sterling could remain under pressure though as markets push back expectations of a rate hike in the UK - there had been an expectation of a 0.25% rise as early as next month but unexpectedly low inflation figures put the dampeners on this last week. Out later this week there is the Bank of England minutes and retail sales - both of which could cause significant volatility given the low volume of trade ahead of the long Easter weekend.

In the euro zone, the Greek government denied any suggestion it will need to restructure its loans but the governor of the country's central bank fanned the flames by warning of a shrinking economy. Worries that Finland would cause problems in the bailout of Portugal also hurt the single currency after an anti-euro party was given a voice in parliament. Finland requires a majority parliamentary vote regarding requests for EU bailout funds.

In the USA, credit rating agency Standard & Poor's announced a downgrade for the outlook of US government debt. S&P cut the outlook for sovereign debt to negative from stable due to risks from the country's growing deficit. The announcement pushed sterling to a high of $1.6329/£1, but sterling is constrained around this level until the Bank of England starts to increase exchange rates.

Elsewhere, fears over stubborn inflation saw China increase interest rates once again yesterday in order to control the economy's rapid expansion. The banking reserve requirement ratio was increased by 0.5% to 20.5%, to be put in effect from 21 April. We also have the release of South Africa's inflation data on Wednesday. This will give investors a clear idea of how much high to lift interest rates and could see volatility if there is an unexpected figure.

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