Sterling outlook gloomy

The Pound continued its poor start to the week yesterday with exchange rates continuing to slide across the board. These losses can be attributed to a number of factors but especially the run up to this weeks Bank of England interest rate announcement on Thursday. The likelihood of any interest rate rise is minimal but the rumours of a second phase of Quantitative Easing measures being announced are getting louder and louder.

Quantitative Easing

What is the reason for and impact of Q.E.?
The idea behind Q.E. is simply to increase the amount of money in the UK economy in the hope of, amongst other things, it filtering through the system and reigniting the housing market, increasing retail sales and in turn reducing unemployment. The problem so far has been UK banks reluctance to lend out this extra money with the aim of improving their own financial position and balance sheets, hence why further measures may be necessary.

The impact of Q.E is fairly serious, with this huge volume of extra money available in the system people, in time, will have more money to spend. The theory of supply and demand tells us that the more people have the more they want things, the more people that want things the more expensive they become............inflation!!!

The principal way of controlling inflation is to increase interest rates and with such a huge volume of extra money in the system, inflation could climb rapidly meaning that interest have to climb equally steeply!!!

Australian Dollar continuing to strengthen

Overnight the Reserve Bank of Australia increased the national interest rate to 4%, the fourth time they have increased the cost of borrowing in 6 months. This will undoubtedly give the Australian Dollar further strength.

Over the past 12 months GBPAUD exchange rates have dropped by in excess of 60 cents from 2.25 to its current level of 1.65, that s a difference of AUD 120,000 on a conversion of £200,000!!!

The strength of the Australian economy is mainly as a result of it virtually avoiding recession and therefore being used as a flight to safety for those with concerns about the security of their savings. Since then more and more investors will be putting funds into the Australian economy as a result of them having higher interest rates and therefore greater yields.

It really does appear that the early bird really is catching the worm, over and over again!!

Uk recession over but the Pound still struggles

Revised GDP figures out on Friday reconfirmed the UK's economy had scraped it's way out of recession in the last quarter, growing by an upwardly revised 0.3%, more than had been previously forecast.

This, I thought, would have given Sterling some well needed strength after a pretty poor week, but it didn't. The Pound continued to lose ground throughout the day, ending the week 2.64% below the week high agains the Euro (when moving £200,000 into Euroland this equates to over €6000!!) and 2.68% against the US Dollar.