Sterling plunged by almost 1% to its lowest level in three-weeks against the Euro today. Sterling also dropped by 1.3% against the Australian Dollar, 1.6% against the Japanese Yen and was generally down across the board. The catalyst for this is the concerns about rising oil prices and the impact they will have on the UK economy. The escalating tensions in North Africa and the Middle East have pushed oil prices to a 30 month high which could have a knock on effect to UK consumer spending.
The Euro and Swiss Franc have both risen strongly as both currencies are now being treated as safe havens. Investors are moving funds out of risky assets. The US Dollar would normally be a beneficiary during times of crisis, however due to its close economic ties to North Africa and the Middle East investors currently prefer the Euro.
Additionally hawkish comments about inflation by European Central Bank official Axel Weber have raised expectations that the ECB will increase interest rates in the coming months. This is likely to be before the Federal Reserve and slightly after the Bank of England and has also helped to boost the Euro.
The big news from yesterday was the release of the Bank of England Monetary Policy Committee minutes for January. Bank of England chief economist Spencer Dale joined Andrew Sentance and Martin Weale in voting for an immediate interest rate increase. The Pound immediately edged higher as a result but has today lost all gains.
When five members of the MPC vote to increase interest rates then the base rate will go up. However MPC member David Miles said in a speech last night that officials shouldn’t rush to raise interest rates to prove they are tough on inflation. He also said that forecasts warrant a ‘very gradual’ tightening.
