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Pound Gaining On Dollar

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Can any of our resident economist gurus explain the current improvement in pound v dollar. We've dropped IR's and theirs are going up.

As per usual it seems a bit counter intuative.

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It was felt that the pound had been over-sold. The recent cut in interest rates and expected US i.r. rises were all priced in anyway.

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Guest Riser

Pound rose because of market pricing out further rate cuts this year.

Pound rises as UK producer prices reach near 20-year high

        LONDON (AFX) - The pound got a fillip as UK interest rate expectations took

a knock after an unexpected surge in raw material costs for producers.

    The pound rose convincingly above the 1.78 usd level while the euro edged

down a little closer to the 0.69 stg mark.

    In data out this morning it was revealed that surging oil prices, as well as

higher costs of imported equipment, caused raw material costs to increase by

their highest annual rate in more than 20 years in the year to July, official

figures showed today.

    Additionally, there was also evidence that manufacturers have been able to

pass on some of these cost increases into their prices, which could raise

concerns at the Bank of England about rising inflationary pressures.

    "With oil prices rising to new nominal highs in early August, this evidence

of an increase in underlying inflationary pressures will reinforce belief that

the Bank of England is unlikely to cut interest rates again in the near future

at least," said Howard Archer at Global Insight.

    Players reacted to the news by pushing the pound higher as they were forced

to adjust rate cut expectations slightly.

    Last week, the Bank of England delivered its first rate cut in two years due

largely to a slowdown in consumer spending, taking the base rate to 4.50 pct

from 4.75 pct.

    Many have been expecting another quarter point cut before the year is out.

These predictions have now taken a knock but not entirely diminished.

    Investec economist David Page pointed out that the central bank is more

concerned about the medium-term outlook for inflation and will not be too

perturbed by short-term fluctuations.

    "The Bank of England knows and expects that inflation will be relatively

firm in the short term on the back of higher energy prices, but the Bank of

England is very much focused on the medium term," he said.

    As such it will take more strong numbers, particularly from the consumer

side, to really end talk of more rate cuts. Against this backdrop, the pound is

unlikely to rise too far.

    The pound's gains were more apparent against the dollar which has been

struggling despite robust US data and the near certainty that the Fed will lift

the cost of borrowing by a quarter point to 3.50 pct tomorrow.

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exchange rate stuff basically works on the projected strength of an economy..that's why we were able to get $2/£1 earlier last year,because the US recovery was uncertain and our economy was still growing at about trend(even though it was nearly all consumer-driven)

the tables have turned a bit now,as a consequence of dollar being weak...any countries that are tied to it have massively benefited from export growth.....problem is someone has to take the slack....and that's eurozone!...to a degree our manufacturers too.

....there is also a bit of government manipulation too....yen is quite commonly fiddled with.

exchange rate varies on rumour of higher/lower IR's relative to other countries....at the moment that bit of news says rates should go up....the next bit of news might say big rise in unemployment,suggesting rates should go down)

Edited by oracle

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  • 301 Brexit, House prices and Summer 2020

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