The move in to the 1.89s this week has been quite a shock to the markets, as at times within the last 8 weeks we’ve seen 2.0 and above! The substantial shift in rates has been due primarily to two things;
Pound Weakness – The data on factory orders released Monday shows a concerning level of UK exports. This is primarily due to the crashing Euro affecting the UKs key trading partner the Eurozone, meaning our exports are too expensive. This is tied in with yet more poor inflation figures giving a pretty dire outlook for the Pound. I wouldn’t be surprised if Mark Carney (Governor of the Bank of England) ‘talked down’ the Pound, in an effort to re-stimulate the economy. Lastly and by no means least, the UK is approaching an incredibly open UK General Election. Political instability is bad news for a currency, so the Pound will suffer.
Australian Dollar Strength – The AUD and USD are linked very closely, as when the US Dollar is weakening (as seen from Friday), investors chase better returns in currencies like the Aussie Dollar. However, I don’t think it will be too long until that flow of money is reversed, subsequently re-weakening the AUD. Continued strength for the AUD (much like the Pound) would not be welcomed by the Reserve Bank of Australia. There’s every chance that another Interest Rate cut could happen over the following months to halt the AUD progress.
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Have a good evening and enjoy the Cricket!