Sterling hits 2-month high versus euro on BoE policy and Eurozone debt worries

Tom Tong12/May/2011Currency Updates

GBP

Sterling reached its highest level since March against the euro after the Bank of England signalled that it will tighten monetary policy later this year. The Bank of England on Wednesday raised its medium-term inflation estimate on renewed increases in energy prices and cut the economic growth outlook due to weak outturns. In its May inflation report, the central bank said inflation is likely to increase further in 2011 on additional increases in energy and import prices. Annual inflation eased in March to 4% from 4.4% in February. Inflation had been uncomfortably high and if utility prices rise further later in the year, it will reach 5%, Governor Mervyn King said yesterday. According to the central bank, inflation is more likely than not to remain above the 2% target throughout 2012 and according to the latest projections, the interest rate is expected to rise by 25 basis points in 2011. Further increases next year are seen taking the rate to 1.5% by the third quarter of 2012.

Elsewhere, British visible trade gap increased in March on falling exports and rising imports. Meanwhile, the first quarter deficit narrowed to the lowest since the final three months of 2009. The deficit in goods trade increased to a seasonally adjusted GBP 7.7 billion from GBP 7 billion in February, figures from the Office for National Statistics showed Wednesday. The expected level of deficit was GBP 7.5 billion.

USD

The dollar rallied to its highest level in about three weeks versus the euro on Wednesday, supported by mounting pressure on the Federal Reserve to hike rates by the end of the year.

A vocal proponent of the Fed’s ultra-accommodative monetary policy acknowledged today that the central bank should hike interest rates later this year if the economy grows at roughly 3% and core inflation continues to pick up. Minneapolis Fed President Narayana Kocherlakota said such conditions should warrant a 50 basis point rate hike before 2012.

Elsewhere, the US trade deficit widened with the value of imports increasing at a slightly faster rate than the value of exports in the month of March, according to a report by the Commerce Department released on Wednesday. The report showed that the trade deficit widened to $48.2 billion in March from a revised $45.4 billion in February. Economists had expected the deficit to widen to $47.7 billion from the $45.8 billion deficit originally reported for the previous month.

EUR

The euro suffered losses all round as investors began a mass sell over concerns about whether the Eurozone will provide financial support to Portugal and Greece. An agreement is expected to be hammered out next week but there are a lot of nervous investors worried that a Greece debt default would put added pressure on Portugal and Spain, exacerbating the regions debt crisis.

Elsewhere, Germany’s annual inflation exceeded the 2% threshold for the third consecutive month in April, the Federal Statistical Office said on Wednesday.

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Written by Tom Tong

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