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Currency update, September 22: sterling falls to two month low

Published:  22 September, 2010

Sterling fell to a two month low against the euro yesterday after stronger than expected demand for Irish and Greek government bonds eased concerns over European sovereign debt.

Currency Rates
EURO/GBP - 1.177
US$/GBP - 1.569
CHF/GBP - 1.561
CAN$/GBP - 1.603
AUS$/GBP - 1.639
ZAR/GBP - 11.028
JPY/GBP - 133.15
HKD/GBP - 12.172
NZD/GBP - 2.128
US$/EURO - 1.331
HUF/GBP - 329.31

Ireland sold 100% of the €1.5bn worth of bonds on offer and Greece managed to sell €390m worth of bonds - 72% of what was on offer. This saw sterling hit a low of €1.1810/£1 as the single currency surged on the strong sentiment that was generated by the bond auction. Sterling wasn't helped after data was released showing that UK public sector borrowing hit a record high for August as interest payouts on UK government bonds shot up as a result of stubbornly high inflation. The data showed that the UK public sector spent £15.3bn more last month than it took in. In terms of today, there is yet more risk that sterling will drop in the form of the minutes of the Bank of England's recent interest rate meeting. With concerns that the Bank are considering further Quantitative Easing, investors are keen to cast an eye over the discussions and thoughts of the decision makers.

In the Euro zone, there were concerns last week over the debt crisis in Europe, as rumours spread that Ireland was seeking help from the International Monetary Fund (IMF). These were quickly allayed yesterday as the bond markets gave the emerald isle a vote of confidence by snapping up the bonds that were on offer. Greece also surprised many, and despite only selling 72% of the bonds that were on offer, this was seen as a huge step towards recovering some confidence in the financial markets. Out later today there is some business sentiment data for Belgium which is unlikely to cause too much of a stir.

In the USA, despite the US dollar coming under significant pressure on Monday ahead of yesterday's Federal Reserve interest rate decision, the announcement turned out to be a bit of a damp squib. There had been concerns that a further round of emergency stimulus would be pumped into the economy, but the Federal Reserve issued an almost identical statement to last month stating that "additional accommodation would be given [to the economy] if required" i.e. they would pump further money to stimulate as and when it was required. Early reaction following the announcement saw risk appetite improve and sterling strengthen by a cent on the day to just over $1.56/£1.

Elsewhere, Canadian inflation was milder than expected in August as energy price rises slowed and the Canadian recovery lost steam. This gives the Bank of Canada much more reason to pause its current interest rate hiking scheme and is likely to see the Canadian dollar pull back. The currency - known as the Looney - has recently come very close to parity (1:1) against the US dollar. Poor inflation data is not going to push it beyond that barrier anytime soon.

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