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Currency update, August 12: uncertainty ahead for UK economy

Published:  12 August, 2010

Currency update for August 12 from Smart Currency Exchange: pound on track for the biggest daily drop against the US dollar since the election.

Currency rates, August 12:
EURO/GBP - 1.215
US$/GBP - 1.569
CHF/GBP - 1.658
CAN$/GBP - 1.642
AUS$/GBP - 1.746
ZAR/GBP - 11.453
JPY/GBP - 134.48
HKD/GBP - 12.189
NZD/GBP - 2.197
EURO/US$ - 1.291
HUF/GBP - 342.30

Sterling dropped by nearly 1% against the US dollar yesterday after the Bank of England's quarterly inflation report said that inflation would drop below the 2% target level in the next two years. In addition the Bank left the door wide open for further emergency funding or 'Quantitative Easing'. The Bank also slashed growth forecasts on the grounds that there is significant uncertainty ahead for the UK, European and US economies.

With markets pricing in increased inflation following next year's VAT hike to 20%, a downward revision came as a bit of shock to many investors and set the pound on track for the biggest daily drop against the US dollar since the election.

The economic prospects for the UK were described as "highly uncertain" and as such further emergency funding could be used if needed. There is hardly any data out today, and as such expect the pound to underperform against the US dollar as a result of continued poor sentiment.

In the Eurozone, the euro dropped by over 1% sterling and over 2% against the US dollar as investors pulled back from riskier investments after the US Federal reserve announced a further round of quantitative easing. The move sparked investors in European assets to pull back as concerns over growth left them fleeing towards safer currencies.

Sentiment towards the pound is better than the euro and as such, despite a poor assessment from the Bank of England, sterling strengthened by over 1% to hit a high of €1.2160/£1. Out tomorrow, there is the European Central Bank monthly bulletin and monthly industrial production data.

In the USA, the main news was that the Federal Reserve announced that they will add additional emergency funding into the US economy to counter the flagging economy. In addition, poor data added to the US dollar's problems as the trade deficit widened by nearly $8bn. Out tomorrow, there is further data on Unemployment claims.

Elsewhere, New Zealand's manufacturing sector shrank for the first time in 11 months which points to waning demand that will put pressure on employment. In addition, the Australian economy added 23,500 jobs in July, but the full time employment rate dropped for the first time in nearly a year.

* Smart Currency Exchange is a currency partner to Harpers Wine and Spirit. Harpers Wine and Spirit has teamed up with Smart to provide readers with a free bespoke currency service.

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