Exchange Rate Outlook for the pound GBP

We also saw some surprise comments by Mervyn King, the governor of the Bank of England. All of this caused much uncertainty in the currency markets. Lets look first at the rates, then at the inflation measures and finish off with Mervyn"s comments......

You can see here that over the last week, the announcement by the FED of more money being pumped into the economy, coupled with the inflation news yesterday, has cause the pound to first fall and then rise. In the last month we have seen rates fluctuation between 1.0550 and 1.13 - a 6.5% difference. To put this in real terms, on a €200k property purchase this means the cost in Sterling has differed by more than £12000.

On a quiet day for UK and EU data, eyes now turn to the UK GDP data released on Friday. Of course any more unexpected comments by the Treasury, BoE or Government could affect Sterlings value.

A big rally for cable over the last few weeks. We have seen rates go from 1.37 to 1.47. A 10 cent increase, again around 6.5% up. This as been caused by Dollar weakness following the FED"s foray into Quantitative easing, and of course the unexpected inflation figures strenghtening the pound yesterday.

We have a fair bit of US data today, so expect further volatility in exchange rates. mortgage applications, durable goods orders and homes sales data is all released today between 11am and 14:30pm.

Inflation - CPI and RPI.

Figures released yesterday show that the Consumer Prices Index (CPI) was pushed up to an annual rate of 3.2% in February, from 3% a month earlier. GOwever, a sharp fall in mortgage repayments caused the Retail Prices Index (RPI), which includes housing costs, to fall to zero for the first time in 49 years.

This measure of inflation is now at the lowest rate since 1960!. Economists had predicted that both measures of inflation would fall. The better than expected figures are what caused the pound to rise yesterday.

So, in a bizarre situation, you have the RPI measure showing we are almost in a situation of deflation, while at the same time the CPI is above target. This means while the BoE are worried about deflation, they will now have to write a letter to the government to explain why CPI inflation is above the 2% target.

So, people like me who don"t own their home are facing higher prices mainly due to food costs, whereas homeowners with a tracker mortgage see their outgoings fall.

Does anyone else see the irony in the fact that its the homeowners who overborrowed and got us into this mess are reaping the benefits while savers like me are seeing interest fall and prices rise? :-(

Mervyn King the governor of the Bank of England yesterday cautioned against further significant government spending to stimulate the economy. Given the high levels of UK debt as a result of recent stimulus packages, Mr King questioned the wisdom of increasing debt by spending more.

Take note. This is very important. Mr King chooses his words very carefully indeed, and it"s no coincidence that he makes the comments just as Gordon Brown is trying to convince the world to pump more and more money into the economy.

This is a very marked signal from the (independent) BoE to the government. This risk for the pound, is if markets lose confidence in the UK government and economy, we could see a run on the pound which would cause the pound to lose a significant amount of its value.

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