Interest Rates Likely to Set Tone For GBP and EUR Exchange Rates

The market is eagerly anticipating tomorrow’s key interest rate announcements from both the Bank of England and the European Central Bank (ECB). Last month in a surprise announcement from the Bank of England we saw two members of the Monetary Policy Committee vote for a hike in interest rates, something that took the markets a little by surprise and resulted in Sterling strength. At the same time in Europe the threat of deflation continues to loom and the pressure is mounting on the European Central Bank to act again in order to stimulate the single currency economy and prevent inflation falling any further. Earlier in the year the European Central Bank decided to cut interest rates in a move to stave off deflation but according to recent figures it has not worked as the Eurozone is not increasingly closer to experiencing negative price change. Some rumours have surfaced that the ECB will act this week with the possibility of pumping more money into their economy through Quantitiative Easing (QE) which could have a big impact on Euro exchange rates. We have seen in both the UK and the US that when QE is announced it can have an immediate detrimental impact on that country’s currency. So, should we hear the ECB make an announcement along these lines tomorrow it could result in some major movement in the currency markets and so if you need to either buy or sell Euros make sure you contact one of our currency brokers here at Foreign Currency Direct plc so we can discuss the latest currency news and the options available to you.

Personally I think it is unlikely we will see any change from the Bank of England tomorrow but the minutes in 2 weeks time may give an interesting insight into whether the 2 members who voted for an interest rate hike were joined by anyone else. In the meantime the chance for a change in policy from the European Central Bank is certainly a possibility and with the Eurozone so close to inflation I think they should act but with so many countries involved in the Eurozone it would take a lot of money, time and planning to get a successful QE programme in place.

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