Sterling rises as CPI data furthers interest rate hike speculation

Tom Tong19/Jan/2011Currency Updates

GBP

Sterling rallied strongly on Tuesday morning, hitting an eight-week high versus the dollar after a surge in consumer price inflation fuelled expectations that UK interest rates may need to rise soon.
Rising oil prices drove annual CPI growth up far more than expected in December to an eight-month high of 3.7 percent, data showed, well above the Bank of England’s 2.0 percent target. Interest rates have been held at 0.5% for 22 months and are expected to rise in May as a result of this.
Today’s key economic data comes in the form of the jobless claimant count released in the UK at 09:30. Thus far analysts’ predictions indicate a flat reading for December and anything other than this will be sure to help sterling continue its recent impressive rally or abruptly bring it to a halt.

EUR

The euro rose against the dollar and traded steadily against the pound on Tuesday largely on the buying by sovereign funds and strong German economic data, but doubts Europe can boost a rescue fund to head off debt problems may prevent further gains.

The euro was able to rally by 1 percent against the dollar during Tuesday trading after Germany released its ZEW headline economic sentiment indicator surged to its highest reading in six months, jumping to 15.4 points in January from 4.3 points in December and racing past forecasts for a reading of 6.8.

Germany’s ZEW numbers came less than a week after comments on inflation from European Central Bank President Jean-Claude Trichet prompted talk that Eurozone interest rates could rise sooner than previously thought adding to investor risk appetite.

USD

The dollar fell to a two month low against the pound and a one month low against the euro on Tuesday, as an inflation report from the UK a possible interest rate hike in the near term while investors became more confident European officials will soon beef up the region’s plans for countering its debt crisis.

Auctions of short-term US three- and six-month bill auctions drew good demand on Tuesday though buy side participation was limited. Risk appetite increasing is impacting on the strength of the dollar at this moment in time.

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Written by Tom Tong

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