Sterling rises amid thin trading volumes; investors focus on inflation data

Tom Tong18/Jan/2011Currency Updates

GBP

The markets were fairly quiet yesterday, with few big currency movements due to lighter trading in the American financial markets which were closed for the Martin Luther King Jr. Day holiday. Sterling was marginally up against the dollar yesterday, hitting an eight week high, and also made gains against the euro due to speculation over interest rate hikes in May. Overnight UK Nationwide consumer confidence and RICS housing data came out above expectations, helping to boost the sterling overnight.

The markets are firmly focused on the pound ahead of today’s inflation data,which is expected to show that inflationary pressures are still weighing on the UK economy. Many investors feel that should we see CPI data for December continuing to rise above the 2% target, in tandem with increased prices, then the BoE will raise interest rates sooner than expected. For the pound this is a short term boost but potentially longer term issue as it signals a change in monetary policy direction for the BoE that could be costly during such an austere spending budget.

USD

Yesterday the greenback dropped off against the euro and the pound, reversing strong earlier gains as a US report showed housing starts were expected to decline in December. The underlying problems with a weak housing market in the US continued rumours that the Fed will keep interest rates on hold for a while yet. Elsewhere, headway could be being made in the ‘currency wars’ as Chinese president Hu Jintao arrived in the US today for bilateral talks. Currently, the US complains about China’s huge overall and bilateral trade surpluses, exchange rate peg, vast foreign currency reserves and violations of intellectual property rights. China complains about incompetent US financial regulation, vast fiscal deficits and the Federal Reserve’s quantitative easing. Yet the meeting may not be as inauspicious as it seems with both keen to address the currency issue as they look to secure their positions as the key players on the global recovery.

EUR

The single currency fell against the dollar yesterday as disagreement and conjecture continued among EU finance leaders over the size of the Eurozone safety fund (EFSF) and the Irish PM was mired in political turmoil as he faces a no confidence vote. The euro also slipped off against the pound after gains last week due to successful bond auctions in Portugal and Spain. Finance ministers met in Brussels on Monday to discuss potentially increasing the size of the emergency fund. However, despite the euro initially making gains due to the arrest of a slide in Chinese shares boosting risk appetite, by the end of the day there was still uncertainty over any increase to the size of the bailout fund and the Euro dropped after speculation that the Irish state may have to take control of the Bank of Ireland as it struggles to raise additional capital.

The ministers showed no indications they were closing in on any firm decisions on yesterday as the chairman of Eurozone finance ministers, Jean-Claude Juncker, said they discussed many options, but favoured none. The Head of Eurozone finance ministers says to work quickly or we could see further losses in the single currency.

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Written by Tom Tong

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