Sterling continues to rise; markets eye ECB rate

Tom Tong03/Feb/2011Currency Updates

GBP

Sterling rose to its highest level in three months against the dollar and gained versus the euro on Wednesday as upbeat data and hawkish central bank comments supported expectations for higher UK interest rates.

The British construction sector recovered in January after poor weather conditions dampened activity in the previous month, a survey by Markit Economics showed on Wednesday. An improvement in weather conditions at the start of the year boosted construction work.

USD

The dollar managed to stabilize on Wednesday after dropping to its lowest in almost three months during Tuesday. The dollar was helped to stabilize by an encouraging prelude to Friday’s all-important jobs report.

Suggesting solid US private sector job growth heading into the New Year, payroll processor Automatic Data Processing, Inc. (ADP) released a report on Wednesday showing that private sector employment increased by more than expected in the month of January. The report said private sector employment increased by 187,000 jobs in January following a downwardly revised increase of 247,000 jobs in December. Economists had expected employment to increase by about 145,000 jobs compared to the increase of 297,000 jobs originally reported for the previous month.

EUR

The euro continued to hold steady on Wednesday with eyes looking towards the European Central Bank interest decision coming up today, and although the ECB is expected to keep rates unchanged, Jean Claude Trichet is likely to continue to speak of inflation risks when he gives his traditional comments. With the European Central Bank looking at raising interest rates sooner than previously forecast – possibly in May – the euro has also been able to withstand a ratings downgrade on debt-ridden Ireland.

Germany said on Wednesday that it had reached broad agreement with France on steps to boost economic coordination in the Eurozone as part of an anti-crisis package which is also likely to see the scope of Europe’s bailout fund bolstered.

Eurozone producer prices rose at the fastest pace in more than two years due to higher energy prices, raising speculation that the ECB will tighten monetary policy in the first half of 2011. The producer price index (PPI) rose 5.3% year-on-year in December following the 4.5% increase in November, latest data from Eurostat showed Wednesday – the highest rate since October 2008.

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Written by Tom Tong

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