Interest hikes are key

By Ben Amrany, March 24, 2011
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It has been a very volatile start to 2011 for sterling exchange rates.

We have seen some excellent gains for the pound spiking at over one-year highs against the US (1.6343) & New Zealand Dollar (2.2246). But on the downside we hit lows against the Euro of 1.1580, while holding fairly steady against the Israeli Shekel (ILS) hovering around the 5.7 level

One of the main drivers for the pound since the turn of the year has been the much-publicised high inflation. We have all been feeling the pinch of rising oil prices, which has an effect on you and me through rising petrol costs to energy and food supplies. Add in the VAT hike and inflation is now well above the two per cent target level set by the Chancellor.

High Inflation normally strengthens a country's currency as it leads to speculation that interest rates will be raised which in turns attracts investors.

A rise in interest rates will give the pound the much-needed boost it requires

Since the start of the year there has been more and more speculation that interest rates will be raised in the UK.

The first full week of every month the Bank of England meet and set the interest rate for the country. The last meeting showed that three members of the Monetary Policy Committee (MPC) voted for a rate hike. There are nine members in total and I believe it is only a matter of time before we see a majority vote for a base-rate hike. This month's rate decision was kept on hold at 0.5 per cent but we could see the rates rise as soon as May or June. This will give the pound the much-needed boost it requires.

Looking ahead to Pesach, there are lots of us that will be spending time outside of the UK, perhaps in Israel and Europe. If you are heading to Israel, the rates of exchange for your purchase of ILS is at a very similar level to where the pound was trading at last year so the cost should not be an awful lot more - in and around the mid 5.5. As the UK economy hopefully starts to strengthen we may see rates rise above 6.0 in the next year, which will be long overdue.

If you are travelling to Spain or Portugal for the holiday period the news that their may be an interest rate hike in the Euro-Zone has really strengthened the Euro this month.

We have seen a high to low movement from (GBP/EUR) 1.16 to 1.20. The pound was marginally weaker last year but let's hope that by the time you go overseas for Pesach the rates of exchange would have got back up near the high of the year.

Ben Amrany is a proprietary trader with Currencies.co.uk

    Last updated: 11:12am, March 24 2011