Best of the Week

British Pound Currency Trends and the UK Base Interest Rate

Interest-Rates / UK Interest Rates Jan 12, 2010 - 04:24 AM

Best Financial Markets Analysis Article This analysis forms part of a series that aims resolve in an accurate UK interest rate forecast for 2010 which follows in depth analysis and forecasts for UK inflation and economy.

Sterling Trend and the UK Base Interest Rate

The below graph shows the UK base rate and sterling trends against the U.S. Dollar and Euro to test the widely held hypothesis that Rising UK interest rates results in a rise in the exchange rate and conversely cuts in UK interest rates results in a fall in sterling.

The Pound / Dollar trend suggests that GBP tends to lead UK interest rates i.e. sterling has a tendency to rise against the Dollar ahead of UK interest rate hikes and a tendency to fall against the Dollar ahead of UK interest rate cuts. The most recent price action has seen sterling rally from £/$1.40 in early 2009 to above £/$1.60 as of the present which therefore implies that the currency markets are discounting future interest rate hikes.

The Pound / Euro trend suggests that the objective is aimed towards a stable exchange rate against the Euro i.e. less volatile hence interest rates are used in an attempt to limit fluctuations as we saw between 1999 and 2007, as when the £/Euro rate was high at 1.60, interest rates were cut, and when the £/Euro was below the floor of about 1.40 then interest rates had been steadily increased so as to maintain the 1.40 floor. This is part of the Bank of England's objective of ensuring price stability by tracking the Euro.

However during 2008 and 2009 we saw a crash in sterling that traded below 1.10 to near parity with the Euro as the Bank of England abandoned everything in the interests of preventing financial and economic armageddon. However as the banking system has gradually stabilised it is highly likely that Bank of England focus will again shift towards price stability which means keeping sterling with an range against the Euro.

The £/Euro has managed to trend higher from near parity 12 months ago to today stand at 1.10. This is suggestive of a higher range then seen over the past 12 months i.e. a probable wide target range of between 1.10 to 1.30 against the Euro, therefore the current rate is at the floor which suggests a rise towards the target mid range of 1.20 which on face value suggests further downside trend is limited and more than likely that the Pound will rise against the Euro towards 1.20, which therefore suggests UK interest rates should be relatively higher than the ECB interest rate to reinforce this trading range.

In summary, the sterling trend is suggestive of the Bank of England targeting a £/Euro trading range of between 1.10 and 1.30, which is therefore suggestive of relatively higher UK interest rates against the Euro-zones which my next analysis will look at.

UK Interest Rate Forecast 2009

The UK interest rate forecast of early December 2008 for 2009 forecast that UK interest rates should decline to 1% (from 3%) by early 2009 and remain there into the second half of 2009.

Forecasts for UK Inflation and Economy 2010 and Beyond

The below are the concluding forecast graphs from in depth analysis for UK inflation and economy that build towards the UK interest rate forecast for 2010 as well as the inflation mega-trends ebook. To receive the final analysis and forecast in your email in box, ensure you are subscribed to my always free newsletter.

UK Inflation Forecast for 2010

UK Economy GDP Forecast for 2010 and 2011

Source: http://www.marketoracle.co.uk/Article16417.html

By Nadeem Walayat
http://www.marketoracle.co.uk

Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on UK inflation, economy, interest rates and the housing market . Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 500 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

Nadeem Walayat Archive

Comments

Post Comment (Moderated)

Subject:

Name:

E-mail address (will not be published):

Comment:

Commenting Issue - If on submitting you are returned to the main Index Page (50% chance) then your comment has not been accepted, Follow below steps for 95% chance of comment being accepted.

Click your browser Back button (from main index page).
COPY your comment text from Comment box (i.e. copy to clipboard).
Press PAGE Refresh - You should see the message "You are not authorized to carry out this operation"
Paste your comment back into the comment text box.
Click Submit - If everything goes okay you will remain on the article page with the message "Your comment was held for moderation and will be reviewed shortly".
If instead you are again returned to the main index page then repeat 1-5, alternatively EMAIL to comments @ marketoracle.co.uk quoting the article number.

The Market Oracle is a FREE Financial Markets Forecasting & Analysis web-site.
(c) 2005-2011 MarketOracle.co.uk (Market Oracle Ltd) - Market Oracle Ltd asserts copyright on all articles authored by our editorial team and all comments posted. Any and all information provided within the web-site, is for general information purposes only and Market Oracle Ltd do not warrant the accuracy, timeliness or suitability of any information provided on this site. nor is or shall be deemed to constitute, financial or any other advice or recommendation by us. and are also not meant to be investment advice or solicitation or recommendation to establish market positions. We do not give investment advice and our comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to enter into a market position either stock, option, futures contract, bonds, commodity or any other financial instrument at any time. We recommend that independent professional advice is obtained before you make any investment or trading decisions. By using this site you agree to this sites Terms of Use. From time to time we promote or endorse certain products / services that we believe are worthy of your time and attention. In return for that endorsement and only in the cases where you purchase directly though us may we be compensated by the producers of those products.