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Sterling jumps, breaking €1.15/ £1 barrier

Published:  12 May, 2011

Sterling jumped by 1.3% against the euro, breaking the €1.15/ £1 barrier for the first time in six weeks.

Sterling jumped by 1.3% against the euro, breaking the €1.15/ £1 barrier for the first time in six weeks.

Currency rates - May 12

EURO/GBP - 1.1492
- 1.6323
- 1.4492
- 1.5727
- 1.5392
- 11.298
- 132.41
- 12.687umps
- 2.070
- 10.316
- 1.4201

Bank of England Governor Mervyn King surprised markets by raising long term inflation forecasts to 5% in yesterday's quarterly inflation report, increasing the likelihood of an interest rate hike sooner than expected. Sterling had been under pressure ahead of the release as many expected the BoE to cut growth and inflation forecasts after a string of shaky data left investors questioning the validity of the UK's recovery. What shocked the markets was that Mervyn King is normally so pessimistic regarding the UK's prospects, and with such a positive move, the markets jumped to buy sterling.


The euro fell yesterday, remaining pressured by uncertainty about whether euro zone officials will restructure the bail out package for Greece. Investors unwound risky positions which saw the single currency fall to a fresh three week low against the US dollar. The euro has gained 2.5% this year against other G10 currencies so far this year off the back of higher interest rate expectations in the euro zone. German wholesale price inflation came in far worse than expected which did not help either.


In the USA, the U.S. deficit expanded to $48.2 billion, the widest since June 2010, and nearly $2bn worse than had been expected. With all the action in the euro zone, the US dollar benefited from risk averse buying, with many investors pulling out of risky investments in AUS dollars, NZ dollars and euros. Exports leapt to a new record but imports rose nearly 5% as oil prices jumped.


Elsewhere, commodity based currencies fell as a result of a general unwinding in risk appetite following the concerns over Greece and the euro zone. Sterling jumped over 2% against the South African rand, hitting R11.25 for the first time in several months. The pound also saw gains against the NZ dollar and Australian dollar.


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