UK inflation figures see sterling rise. Markets eye UK budget

Tom Tong23/Mar/2011Currency Updates

GBP

The pound leapt to a 14-month high against the US dollar during Tuesday trading as data revealed stronger than anticipated levels of inflation, heightening the possibility of an interest rate hike from the Bank of England in the next couple of months.

British annual inflation jumped to 4.4 percent in February, the highest level for more than two years and compared with a rate of 4.0 percent in January, levels which more than double the Bank of England’s 2.0 percent target. Consumer price index inflation has been propelled by soaring domestic gas and electricity bills, record prices for diesel and petrol and rising clothing costs.

The pound also gained 0.7% against the euro on Tuesday, with the spread between 2 year German and UK yields narrowing to 0.42% from 0.51% percent on Monday, which applies selling pressure to EUR/GBP

Today’s focus among investors will focus on both the Bank of England Minutes at 09:30 and then the UK’s budget decision released at 12:30 this morning. Although the minutes from the March rate decision meeting are not biased by yesterday’s inflation data, it will give a key insight into the propensity of the MPC to raise interest rates.

EUR

The euro lost ground against 13 of its 16 most traded counterparts during Tuesday as worries resurfaced about debt problems in Ireland and Portugal, with mounting concern that the Portuguese government may collapse as parliament prepares to vote on budget cuts that have divided lawmakers.

Portugal’s political crisis has hampered a resurgent euro; however, some analysts suggest that even if the government were to fail, any selling pressure the euro comes under is unlikely to be too severe. This outlook is down to expectations EU leaders are close to agreeing the details of a debt rescue fund combined with an interest rate rise expected as early as April.

USD

The dollar saw a very early bounce on Tuesday. Despite recording a five month low against the euro, (the euro has since lost ground due to sovereign debt concerns) it seems that risk appetite is still a driver for the US dollar. The greenback’s performance mirrored that of the major equity indices through Tuesday’s trading sessions.

The dollar declined against sterling following the release of UK inflation figures but stabilised as sentiment became priced in.

Ben Bernanke is due to deliver a speech titled “Community Banking in a Period of Recovery and Change” at the Independent Community Bankers of America National Convention and Techworld, in San Diego. He will respond to later questions, and his answers will be closely monitored.

Key US figure released today will be new home sales.

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Written by Tom Tong

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