A rollercoaster ride for sterling as interest rate speculation continues

Published: 18 February, 2011

The rollercoaster ride for sterling continued yesterday, as a speech by Bank of England policymaker Andrew Sentance reignited speculation over interest rate hikes.

Currency rates

EURO/GBP - 1.1930

US$/GBP - 1.6202
CHF/GBP - 1.5411
CAN$/GBP - 1.5911
AUS$/GBP - 1.6009
ZAR/GBP - 11.6580
JPY/GBP - 135.023
HKD/GBP - 12.6108
NZD/GBP - 2.1251

SEK/GBP - 10.3992
US$/EURO - 1.3575

As a result, sterling strengthened back up against the US dollar and euro. Sentance, who has been calling for an interest rate hike since June 2010, made it clear that there are numerous risks that will add to inflation and as such, interest rates need to rise faster than many think in order to filter through to the real economy and keep inflation on target. The constant back and forth over interest rate expectations is causing sterling movement on a day by day basis as sentiment shifts between swift interest rate hikes or no action from the Bank of England. Any feeling that interest rates will rise soon sees sterling strength and expectations that policy will remain unchanged will see sterling fall. Today, there are retail sales and mortgage data which is potentially market moving. Next week, the Bank of England's minutes from last week's meeting will be closely watched.

In the euro zone, reminding us that inflation is not just an issue faced by the UK, German producer price (or "factory gate") inflation has shown a 1.2% jump on the month - far more than the modest 0.6% gain that was expected. Unlike the UK, wage inflation is on the up - driven by union demands within the auto-manufacturing sector. This brings the possibility of an interest rate hike in the euro zone into play and as such, risk appetite for investors has already improved.

In the USA, the US dollar held near 2 week lows against the Swiss franc yesterday as the Swiss currency saw demand related to the situation in the Middle East. Anti-government protestors from Bahrain to Iran hoped to emulate their counterparts in Tunisia and Egypt and as such, as is normal in times of geopolitical tension, the Swiss franc sees 'safe haven' demand.

Elsewhere, the G20 summit of finance ministers and central banks kicks off in Paris today with the focus on global imbalances. As a result, discussions are likely to turn to currency - especially China's fixed exchange rate that is a major cause of current imbalance.

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