Prospects of an interest rate rise continues to support sterling

Published: 22 February, 2011

Sterling hit a high of $1.6260/£1 yesterday, but struggled to push much higher as investors took profit from sterling's recent run against the US dollar.

Currency rates

EURO/GBP - 1.1920

US$/GBP - 1.6136
CHF/GBP - 1.5265
CAN$/GBP - 1.5916
AUS$/GBP - 1.6136
ZAR/GBP - 11.6464
JPY/GBP - 134.25
HKD/GBP - 12.57
NZD/GBP - 2.1554

SEK/GBP - 10.5193
US$/EURO - 1.3532

Positive comments from a key Bank of England policymaker helped support sterling, as Martin Weale (who voted for an interest rate hike last month) stated that a small interest rate rise now would reduce the need for a large rise at a later date. Whilst the prospect of an interest rate hike helped support sterling, markets are waiting for Wednesday's Bank of England minutes to see if any other of the nine strong committee joined Andrew Sentance and Martin Weale in voting for an interest rate hike this month. It is worth noting that a lot of the current interest rate hike speculation is already 'priced in' (i.e. reflected in the exchange rate already) and as a result, there could be no real movement. We are at the highest level against the US dollar for nearly a year.

In the euro zone, the euro slipped yesterday following risk aversion relating to the escalating tensions in the Middle East and North Africa. In times of geo-political turmoil, investors generally look to safe haven currencies. As a result, the Swiss franc has seen some strength against the euro today. However, the euro did see some support from strong fundamental data, with German business confidence hitting a record high and purchasing managers' data beating expectations.

In the USA, with the markets closed for a bank holiday, there was no real data impacting the price. With the increase in violence in the Middle East and Libya in particular, oil prices have jumped to a 2 ½ yr high - which you would expect to see correlated with US dollar strength. However, what we have seen recently is US dollar weakness with the current situation as investors worry over the future impact on US foreign policy of massive upheaval in the region. Interesting times, so make sure you are on top of any upcoming payments.

Elsewhere, the Australian dollar has remained resilient despite moves by China over the weekend to rein in inflation and reduce monetary supply. China's moves have been greeted with relief by many rather than panic, and with Australian economic fortunes closely linked to China's economic demand, a move to address an expanding bubble is a sensible move by the Chinese.

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