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Currency update, July 13: UK inflation declines

Published:  13 July, 2010

Currency analysis from Smart Currency Exchange for July 12: UK inflation declines.

Currency rates, July 13
EURO/GBP - 1.196
US$/GBP - 1.499
CHF/GBP - 1.594
CAN$/GBP - 1.553
AUS$/GBP - 1.721
ZAR/GBP - 11.420
JPY/GBP - 132.60
HKD/GBP - 11.663
NZD/GBP - 2.119
HUF/GBP - 334.04

The key data today is the UK inflation figures, which are likely to show a decline from last month's annual rate of 3.4% - reflecting the spare capacity of the economy. Mervyn King has been saying for some time that inflation will fall off through the year - justifying his decision to keep interest rates and the asset purchase programme on hold.

Sterling fell against the US dollar on Monday after concerns resurfaced over the UK's triple A credit rating. Standard & Poor's said it was maintaining the negative outlook on Britain's economy as the challenging spending cuts announced in the recent emergency Budget have yet to be made and the economy may not grow as fast as the government has predicted. Despite the recent Budget announcement, the government has yet to implement the required spending cuts and this is what concerns the credit rating agency.

Elsewhere, GDP for the first Quarter remained unchanged at 0.3% and the current account deficit unexpectedly jumped by £5 billion.

In the Euro zone, news has just been announced that Portugal's credit rating has been downgraded. This reflects the ongoing concerns over sovereign debt in the region, and yesterday saw the euro give back gains to the US dollar and pound on concerns on what bank 'stress testing' would uncover.

Recent euro strength - against sterling and US dollar - has been seen as a reflection of weakening prospects in the UK and the USA and not as a reflection of any reduction in the issues surrounding sovereign debt in the region.

In the USA, the US dollar gave back some of the gains made against the pound. However, the US dollar is still holding firm below the $1.50/ £1 level - currently trading at $1.4990/ £1.

Elsewhere, the New Zealand dollar benefited overnight and was the best performing currency against the US dollar after speculation over interest rate hikes saw investor expectations increase. A survey showed that many are expecting a rise of 130 basis points - up from 118 points the other week. Higher interest rates mean better returns for investors, therefore demand increases for the currency and it strengthens.

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