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Sterling hits three month high against euro

Published:  05 August, 2011

Sterling has had an interesting week - hitting a three month high against the euro yesterday of €1.1550/£1.

Currency rates, August 5:

EURO/GBP - 1.1544
US$/GBP - 1.6263
CHF/GBP - 1.2475
CAN$/GBP - 1.5976
AUS$/GBP - 1.5563
ZAR/GBP - 11.2956
JPY/GBP - 127.60
HKD/GBP - 12.6944
NZD/GBP - 1.9463
SEK/GBP - 10.6451
AED/GBP - 5.972
US$/EURO - 1.4084

The pound fell early in the week after poor manufacturing data, but recovered as services sector activity unexpectedly jumped. In the wake of an 11th hour agreement on raising the debt ceiling in the USA, there has been the beginnings of a paradigm shift in the market attitude to the UK.

UK government bonds are now being regarded as the safe-haven option ahead of US bonds. This marks a step change in market behaviour and is testament to the UK government's hard-line cost cutting that is in stark contrast to both the US and the euro zone. The Bank of England kept interest rates on hold but there is a large amount of volatility.

The euro plummeted on Thursday after the ECB pledged to lend euro-area banks as much money as they need for six months and extend its existing liquidity measures through until the end of the year. Keeping the interest rates unchanged at 1.50%, ECB President Jean-Claude Trichet told a press briefing in Frankfurt that the decision was taken with an "overwhelming majority."

The move prompted investors to sell the single currency in favour of sterling despite an unexpected rise in German factory orders. Italian and Spanish bonds came under yet further pressure and it looks like these countries are next in the firing line.

It was an interesting week in the USA after Democrats and Republicans finally reached agreement over spending cuts in order to increase the debt ceiling. In a package worth $2.1trn over 10 years, the US managed to avoid a default on a key payment this week. However, despite reaching agreement, some credit rating agencies feel that the US may have not gone far enough and as such the prized AAA rating is at stake again.

Elsewhere, Swiss and Japanese central banks intervened in the currency markets to try and devalue their respective currencies. Swiss exporters have been hit by a 40% increase in the value of the currency as markets clamber for the safe-haven of the Swiss franc. The Swiss National Bank cut interest rates and the Japanese government sold 1 trillion yen to ease pressure on the yen.

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