Sterling weakens due to speculation over quantitative easing

Published: 28 June, 2012

Sterling was particularly weak yesterday, dropping against the majority of currencies; but, remained fairly range bound against the euro.

Currency rates - June 28

EURO/GBP - 1.2472
US$/GBP - 1.5608
CHF/GBP - 1.4991
CAN$/GBP - 1.5985
AUS$/GBP - 1.5425
ZAR/GBP - 13.0890
JPY/GBP - 124.02
HKD/GBP - 12.1134
NZD/GBP - 1.9631
SEK/GBP - 10.9768
AED/GBP - 5.7276
US$/EURO - 1.2510
INR/GBP - 88.93

Speculation that the Bank of England could increase the level of quantitative easing next month continues to weigh on sterling's strength. Data released showed that the number of mortgage approvals has dropped from last month; but, the Confederation of British Industry (CBI) index showed that retail sales volumes have increased to the highest level since December 2010 on the back of the Jubilee celebrations. Current account figures will be the main UK news today; but, the main focus will be firmly on the EU economic summit and the developments from Spain in particular.

The euro was weak yesterday partly due to rising yields from Italian bonds; but, also due to investors selling the euro in the run up to the EU Economic Summit. The Spanish prime minister also hinted that a full government bailout may be required if borrowing costs continue to remain as high as they currently are. Investors also started to speculate that the European Central Bank may pause on its asset purchase facility and may actually cut the central bank rate which caused the euro to weaken further still. Today we have a bench mark 10 year Italian bond auction which will benchmark investors' confidence in the nation. A noted the main focus will be on the EU Economic Summit which starts today which could cause a lot of volatility if any shock announcements are made.

The US dollar performed well yesterday as data showing the number of homes pending sale increased by more than anticipated. Durable goods orders released yesterday were also positive, showing a vast improvement on last month's figures where orders actually contracted. The data showed a 1.1% rise in durable goods orders and a 0.4% rise for durable goods orders excluding transportation (although a higher reading of 0.9% was expected). The main data on the agenda will be the change in the number of people claiming unemployment benefits which has been worse than expected for the last two readings; so, the markets will hope for an improvement.

Elsewhere, the main news came from China as rumours started to circulate that pro-growth policies could be implemented to help the world's second largest economy. Japanese retail sales data, Australian home sales data and business confidence figures from New Zealand were all released late last night; but, there is very little other data on the economic calendar today.

If you haven't opened a Smart account yet, call on 0845 638 0571 (+44 0207 898 0500) or fill out our online Account Form