Sterling rises against dollar as rate hike speculation continues

Tom Tong01/Feb/2011Currency Updates

GBP

Sterling was a major beneficiary of the euro’s rebound yesterday as it followed suit, moving up against the dollar. The pound was lifted by the news that there had been a jump in Eurozone inflation data, causing speculation that a rate hike would come sooner rather than later in both the EU and UK. The data release combined with the comments of BoE policy maker Martin Weale, who surprised the market by voting for a rate hike last month – albeit before the abhorrent GDP figures – continued speculation that the UK would hike rates. This is seen as bullish for sterling as monetary tightening by the European Central Bank and the BoE would increase the returns on Eurozone and UK assets compared with those held in dollars as the Federal Reserve is not seen raising rates any time soon.

Sterling was able to shake off the potential dampening effect of the turbulence in Egypt as robust factory activity data out of the US set a positive tone for the rest of the week’s US data, including non-farm payrolls on Friday, balancing risk appetite. However, with danger of uprising spreading in the Middle East, traders warned of continued volatility in the week ahead.

This morning the UK nationwide housing data was slightly up month on month but down by 0.1% for the year on year prediction. This data should have little fundamental impact, as the UK housing market has been under pressure all year, but the data has caused a small drop against the euro since 7am.

USD

The dollar lost ground against sterling and the euro yesterday as speculation of rate hikes in the Eurozone and UK contrasted with the ultra-loose policy of the Fed. The monetary policy stance of the Federal Reserve has diminished demand for the dollar despite less risky assets typically being beneficiaries of the type of political turmoil and uncertainty we have been seeing in Egypt. Surprisingly strong US factory data may have supported risk appetite as investors feel that this could signal a run of positive data out of the US this week, solidifying hopes of recovery in the US and globally. As such eyes will be on the US manufacturing survey today as well as Friday’s monthly payroll data.

EUR

The single currency clawed back its recent losses against the dollar yesterday but ceded some ground to sterling. The euro crept back towards almost a two month high against the dollar yesterday after a jump in Eurozone inflation figures caused more speculation of interest rate hikes and the risk aversion due to the political events in Egypt fell away slightly. The inflation data, combined with the fact that ECB president Jean Claude Trichet warned about price pressures last week all point towards hikes. Investors will look towards his speech after the ECB’s monthly meeting today for further indication of policy. Reports over the weekend that the European Union was working on a solution to reduce Greece’s debt burden also helped boost the euro, with the recent EFSF bond auction being seven times oversubscribed.

The euro lost ground against the pound as sterling remained a more appealing investment due to the fact that interest hikes are likely in the UK but the country is not as affected by sovereign debt issues and banking shortfalls evident in peripheral Europe.

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Written by Tom Tong

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