GBP to Dollar (GBP/USD) + Pound to Euro (GBP/EUR) Exchange Rates Fall From 2014 Highs

The pound euro exchange rate (GBP/EUR) is meanwhile below the best levels seen since December 2012.

We have seen some weakness start to emerge in the mid-week session following on from the testimony by Bank of England members to the UK parliament.

For reference, the following rates are seen at the time of writing:

• The pound to euro exchange rate is trading 0.21 pct lower on a day-to-day basis at 1.2450.
• The pound to dollar exchange rate is seen 0.16 pct lower at 1.6958.

Please be aware that the above mid-market quotes are subject to a discretionary spread levied by your bank. An independent FX provider will however seek to undercut your bank's offer and in some instances can deliver up to 5% more currency on execution. To learn more, please read here.

Why are sterling exchange rates lower mid-week?

The first 20 minutes of his appearance in front of the Treasury Select Committee saw Governor Mark Carney row back some of the surprising hawkishness in his recent Mansion House speech.

It was this hawkish tone that was responsible for delivering the best GBP exchange rates of 2014.

Speaking 12 days ago, Carney said that home owners and businesses should be prepared for interest rate rises and that the first of these could happen sooner than markets currently expect.

"Today’s comments however have continued with a similar tone to his previous communications in that spare capacity in the labour market will be difficult to overcome, that wage pressures will come through eventually but remain poor at the moment and, as a result, inflationary pressures are not an issue at the moment. This lack of a normalising inflation expectation leads to a lack of a normalising of monetary policy and hence the GBP weakness this morning," says Jeremy Cook at WorldFirst.

The bigger picture: Forecasters scramble to catch up with pound sterling

The British pound remains the most coveted currency among traders, who are betting that 2008 highs it is currently hitting, is just getting started.

According to currency brokerage Afex:

"Hedge funds and other large speculators are more bullish on sterling than any other major currency.

"Strategists from Commerzbank AG to Wells Fargo & Co. boosted their forecasts in anticipation of further gains. Bullish sterling bets measured by the CFTC are, as of last week, at the highest level since 2007.

"Mark Carney gave new impetus to the Sterling’s advance by telling financiers on June 12th that the UK’s first post-crisis rate increase “could happen sooner than markets currently expect.” The pound surged 1.7% versus the USD this month, the best performer among 16 major currencies."

A slow week ahead for the GBP

Sterling had a broadly steady week last week following its surge at the end of the previous week.

It did push up through the 1.70 level against the US dollar and hit five year highs as the Federal Reserve were more bullish about the US economy than markets expected.

However, a slow week lies ahead in terms of economic data releases from the UK, and any major market movements will likely be driven by events elsewhere.

"An announcement by BoE Governor Carney on Tuesday may affect the currency as investors will be keenly listening for any indicators on future monetary policy. This will be particularly interesting given last week’s release of minutes from the latest meeting of the monetary policy committee, which showed that policy makers had little stomach in the short term for an interest rate increase," says Carl Hasty at Smart Currency Business.

With little discernible event risk ahead we may see markets ease back on their sterling buying and consolidation will likely carry the day.

Also keep an eye out for profit-taking. With such a strong run behind us the possibility of traders booking profits should not be discounted.

Is the UK economy all that strong?

No doubt, the ultimate driver behind the British pound exchange rate complex at present is the underlying strength in the economy.

The economy is growing at a rate the Bank of England and other analysts had not expected and this has allowed unemployment to fall.

However, a note from RBS economics reminds us that the economy is not necessarily as healthy as it should be - and this will have longer-term implications for the strength of GBP:

"The UK economy is at variance with itself. There’s little doubt about the strength of the recovery, increase in employment or the pace at which London house prices are rising. Yet productivity growth is weak.

"It’s taking more of us in work to produce the same as we did pre-crisis. Also, wage growth remains poor and, despite happy shoppers and a buoyant economy, inflation is falling. It’s a puzzle. And like the Enigma code, a tough one to crack."

Limited enthusiasm for the euro

The pound to euro exchange rate is meanwhile tipped to remain well supported thanks in part to the under-performing euro.

The June preliminary PMI readings remained soft across the Euro-zone with French manufacturing and services give signs of faster contraction in June while German activity shows slower recovery.

The overall Euro-zone manufacturing PMI fell from 52.2 to 51.9.

"The big picture suggests the continuation of low inflation in the Euro-zone. Spain and Germany release the June inflation estimates on Friday, Euro-zone consolidated CPI estimate is due in Monday 30th. Despite the positive skewness in short-term technicals, we remain sellers on rallies," says a note from Swissquote Research.

Although the broad based USD weakness give support to EUR/USD, Swissquote remain cautious regarding the upside.

"Besides the loose ECB policy and the IMF’s QE recommendation to fight the Euro-zone deflation, the 10-year UST/Bund spread also suggests a slowdown in positive EUR/USD tendency. In fact, the 10-year UST/Bund spread stand at the highest since mid-1999, we believe that a mid-run correction should ease the upside pressures in EUR/USD," says a note from the bank.