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Sterling hits five month high against euro

Published:  09 November, 2010

Sterling rose to a five month high against the euro yesterday as concerns over Irish debt dented the single currency and investors began to question the effect of debt in the Euro zone region.

Currency Rates
EURO/GBP - 1.161
US$/GBP - 1.608
CHF/GBP - 1.551
CAN$/GBP - 1.618
AUS$/GBP - 1.594
ZAR/GBP - 11.060
JPY/GBP - 130.00
HKD/GBP - 12.470
NZD/GBP - 2.053
SEK/GBP - 10.844
US$/EURO - 1.385
HUF/GBP - 320.76

With data fairly thin on the ground yesterday in the UK, many are looking ahead to Wednesday's Bank of England inflation report and Mervyn King's subsequent press conference. The report will contain the Bank's updated forecasts for growth and inflation, and the press conference will give an insight into how seriously the Bank of England considered further Quantitative Easing last week - especially in the light of the US Federal Reserve's decision to pump an additional $600bn into the economy. Mervyn King has the ability to be rather downbeat when speaking publicly, so call in now to ensure you don't get caught out. Out today there is industrial and manufacturing figures alongside the UK trade balance - all of which have the potential to see market movements.

In the Euro zone, the euro slipped yesterday following concerns over the Irish budget. The opposition party in Ireland said that they would not back next month's budget and a report in a Sunday newspaper cited a "senior market player" who was critical of the proposed plan to cut Ireland's deficit. As a result, financial markets revisited concerns over the 'peripheral' (i.e. Spain, Greece, Portugal) European debt and this saw the euro fall against sterling and the US dollar. Out later today, there is German inflation data and French public finance figures.

In the USA, after several weeks of selling pressure ahead of the Federal Reserve's announcement to pump $600bn into the economy, the US dollar finally had some respite. As the focus turned back to European debt, the US dollar recovered to hit a high of $1.3888/€1 against the weaker single currency and took back some ground against sterling as investors covered extreme US dollar short positions, which meant buying back US dollars.

Elsewhere, China and Germany (both major exporting nations) have heavily criticised the Federal Reserve's "QE2" (or second round of Quantitative Easing) as it has already seen investors start pumping cheap US dollars into emerging markets in the expectation of higher return on investment. The problem with this is that it destabilises the global economy and leaves exporting nations with prohibitively high exchange rates - exactly why China is reluctant to allow the Chinese yuan exchange rate to float freely against the US dollar.

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