Sterling rises versus euro on the back of inflation report

Tom Tong11/Nov/2010Currency Updates

GBP

Sterling rose on Wednesday as speculation of near-term quantitative easing by the Bank of England receded, following the central bank’s forecast that inflation would rise above target next year.

The main news out of the UK on Wednesday was the central bank raising its near term inflation forecast but seeing inflation falling below the 2% target in the two-year horizon. Boosted by the rise in the value added tax next year and continuing increases in import prices, inflation is likely to stay above the 2% target throughout 2011, the Bank of England said in its latest quarterly Inflation Report on Wednesday. But inflation will possibly fall back below the target, reflecting the persistent margin of spare capacity. Inflation is seen at around 1.6% by the end of 2012.

EUR

The euro weakened across the board on Wednesday.

Ireland’s cost of borrowing has rocketed to its highest level since the launch of the euro in 1999 after a dramatic sell-off by bondholders and banks. The move increased concerns that the Irish government will be forced to seek external aid to help it bail out the country’s banks. On Wednesday night the International Monetary Fund said that Ireland had not requested financial assistance and that relations were normal. European Commission president Jose Manuel Barroso said Thursday that the EU stood ready to support Ireland “in case of need” after Irish bond yields soared to record levels on public debt fears.

USD

The dollar continued to fight back against other major currencies on Wednesday,as world leaders gathered in Seoul, South Korea for tomorrow’s pivotal G20 Summit. A numbers of issues involving currencies will take centre stage amid criticism that nations are devaluing their currencies to get an edge in the manufacturing sector.

US import prices saw a significant increase in the month of October, according to a report released by the Labour Department on Wednesday, with the increase largely due to a substantial rebound in fuel import prices. US export prices also showed a notable increase for the month.

Elsewhere, the number of people filing first-time unemployment claims dropped last week, coming in below what economists were expecting.

The US Labour Department revealed that initial jobless claims came in at 435,000 for the week ended November 6. This was down 24,000 from the revised reading of 459,000 last week. Economists had expected the figure to come in at 450,000.

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Written by Tom Tong

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