Safe haven demand diminishes; sterling reaches 3-month highs versus dollar

Tom Tong02/Feb/2011Currency Updates

GBP

On Tuesday sterling reached its highest level against the US dollar in three months as risk appetite in the market increased, fuelled by heavy speculation that the Bank of England will be increasing interest rates over the coming months.

Two Bank of England MPC members Andrew Sentance and Charles Bean are now joined in their views that the Bank of England must look at raising interest rates in order to balance inflation and tackle spiralling commodity prices.

The pound also benefited heavily during Tuesday trading following the release of strong UK manufacturing activity in the form of the purchasing managers index (PMI). This reading unexpectedly climbed to 62.0 in January from an upwardly revised 58.7 in December. This was the highest reading since the survey began in 1992 and well above the consensus forecast of 57.9.

EUR

During Tuesday trading the euro hit its highest level against the dollar in over two months as expectations surrounding Eurozone rate hikes grew. The European Central Bank has stated that its core target for economic management is to keep inflation around the 2.0 percent level and not above, however, on Monday inflation leapt to 2.4 percent, fuelling speculation that a rate hike will be happening in the not too distant future.

Emphasising the Eurozone’s inflationary pressures, a key indicator of manufacturing health published on Tuesday showed a record rise in raw materials costs with goods prices also rising at their fastest pace since the economic crisis began.

USD

The dollar weakened against a basket of currencies during Tuesday trading, falling to its lowest levels in nearly three months against the pound and euro, as a string of robust economic data and easing concerns over Egypt diminished safe-haven buying of the greenback.

Tuesday brought about strong manufacturing figures from the US and UK, which has fuelled optimism surrounding global economic growth. This combined with expectations of loose monetary policy has heightened risk appetite.

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Written by Tom Tong

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