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Pound sterling surges to 10 month high against the euro

Published: 8 Nov at 10 AM Tags: Pound Sterling, Euro Exchange Rate, Swiss Franc Exchange Rate, Euro Crisis, UK, Economy, Inflation, France,

The European Central Bank (ECB) surprised the markets yesterday with a 25 basis point interest rate cut, cutting euro zone interest rates from 0.5% to 0.25% following the very disappointing inflation and unemployment data out of the euro zone last week.

The euro immediately came under heavy selling pressure and the pound surged to a high level against the euro not seen since 14 January 2013.

In his accompanying press statement, ECB President Mario Draghi said the bank expected to see "a prolonged period of low inflation followed by a gradual upward movement towards inflation rates of below but close to 2%", and said the euro zone was seeing "weaker than expected economic activity”.

There is further bad news for the euro zone this morning with the decision by credit ratings agency S&P to downgrade France’s credit rating by one notch to “AA” citing high unemployment and recent reforms to the tax system to downgrade the euro zone’s second largest economy.

As predicted, the Bank of England kept both UK interest rates and the size of its QE budget unchanged at 0.5% and £375 billion respectively. UK interest rates have now been set at 0.5% since March 2009.

The decision was fully expected following the better than expected data out of the UK this week with manufacturing; construction and industrial orders data all beating estimates.

Over the pond, US data surprised to the upside yesterday afternoon. Despite the 16 day government shutdown last month, US Gross Domestic Product (GDP) out yesterday afternoon was surprisingly robust at 2.8%, the quickest pace for a year. Today sees the publication of the key US employment data, known as non-farm payroll data.

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