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Posted December 15th, 2010 by Charles Purdy

EUR/GBP Rate & Comments for 15th December 2010

EURO/GBP - 1.1806 

Sterling dropped from 3 week highs against the US dollar yesterday after strong US figures helped boost the US dollar. UK inflation came in at 3.3% – the highest for 6 months – and the 11th consecutive month that it has been more than 1% higher than the Bank of England’s 2% target level. With GDP growth higher than trend and inflation persistently above targets, analysts now feel that there is only a small chance that the Bank of England would embark on a further round of Quantitative Easing, with many talking about the prospect of interest rate hikes early next year. With a VAT hike to 20% in the coming weeks, and a report released yesterday that suggested retailers would use the price rise as a smokescreen to increase prices beyond the 2.5% level, there are concerns that inflation will jump next year. You would expect sterling to strengthen as a result, but large selling of sterling by one Australian dollar buyer and thin trading volumes saw the pound drop. In the long run, yesterday was great news for the UK – especially given the USA has embarked on a 2nd round of QE and the Euro zone is in such a mess.

In the Euro zone, the euro slipped against the US dollar following the stronger than expected US retail sales figures. The euro started the week at $1.32/1 before hitting a high of $1.35/1 early on Tuesday and slipping back on the US figures. The focus revolved on the US economic situation and whether the Federal Reserve would add to the additional $600bn of asset purchases. Economic sentiment in Germany was stronger than expected yesterday also – call in now for a live exchange rate.

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