Sterling drops below €1.12/£1

Published: 23 June, 2011

Sterling fell against the euro yesterday, dropping below €1.12/£1 as the Bank of England minutes raised the possibility of further Quantitative Easing.

Currency rates - June 23

EURO/GBP - 1.1239
US$/GBP - 1.6057
CHF/GBP - 1.3501
CAN$/GBP - 1.5624
AUS$/GBP - 1.5222
ZAR/GBP - 10.856
JPY/GBP - 129.16
HKD/GBP - 12.507
NZD/GBP - 1.9677
SEK/GBP - 10.283
US$/EURO - 1.4278

The Bank kept interest rates on hold at 0.5% and felt that the growth outlook for the UK had weakened, raising the prospect of another round of stimulus in the same vein as the Federal Reserve's recent "QE2". The latest member of the committee (who took over from Andrew Sentence) decided not to follow his predecessor in voting for a rate hike and stuck with the crowd in voting for no change. Sterling's prospects are closely linked to growth, with the Bank unlikely to increase rates until it has seen significant growth. Sterling is likely to flounder against the euro - especially if the ECB presses ahead with its planned 0.25% interest rate hike next month.

Following last night's vote of confidence in Greece, there were the beginnings of a sense that the relevant austerity measures will be passed and Greece will receive funding from the ECB. However, the uncertainty over Greece has prompted markets to speculate that the ECB may not follow through with the planned 0.5% rate hike in July. The euro began to slip against the US dollar later in the day as the impact of the Greek government surviving a confidence vote waned and some investors switched focus to the U.S. Federal Reserve.

In the USA, the dollar dropped against a majority of its most-traded counterparts on speculation that the Federal Reserve would maintain monetary stimulus without buying more debt as economic growth remains sluggish. In the end, the Fed confirmed that it would make no change to its baseline interest rate and that the US recovery was continuing at a moderate pace. The central bank's second round of quantitative easing, the purchase of $600 billion of Treasuries, is scheduled to end this month.

Elsewhere, the Canadian dollar dropped against most of its major counterparts on concern that slowing US growth will prompt the Federal Reserve to emphasise the need to maintain stimulus in the US. As Canada's largest trading partner, a weak US recovery is not good for Canadian exports.

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