Sterling boosted by prospect of tightening monetary policy

Published: 01 February, 2011

Sterling rose against the US dollar on Monday, boosted by a strong day for the euro.

Currency rates

EURO/GBP - 1.1676

US$/GBP - 1.6052
CHF/GBP - 1.5078
CAN$/GBP - 1.6004
AUS$/GBP - 1.5984
ZAR/GBP - 11.5015
JPY/GBP - 131.37
HKD/GBP - 12.5088
NZD/GBP - 2.0670
SEK/GBP - 10.2646
US$/EURO - 1.3754

Data showed increasing inflation in the region and increased expectations of an interest rate hike in the euro zone. Sterling also saw a boost from a newspaper article in which Martin Weale (the latest Bank of England policy maker to call for a 0.25% interest rate hike) stated that a small interest rate hike soon would cost less than sustained inflation in the long run. The prospect of tightening monetary policy in the euro zone and UK contrasts sharply with the USA, where the Federal Reserve is likely to keep monetary policy loose for some time to come. Out today, there is important house price and manufacturing data.

In the euro zone, inflation came in at 2.4% for the year - up from 2.2% the last month. This follows on from ECB president Jean-Claude Trichet's comments a few weeks ago warning over higher inflation. Higher interest rates in the region will make euro based investments a more attractive option and as such, saw the euro strengthen against the US dollar. It seemed that both the euro and sterling shrugged off any concerns over the situation in Egypt, which has the potential to cause shocks through the currency markets.

In the USA, the US dollar slipped to near a 2 month low against the euro as the USA's monetary policy outlook contrasted sharply with the euro zone's inflation and potential interest rate hikes. Markets are now keeping an eye on the key level of $1.3760/ €1 - if the euro goes through this, it could open the door to $1.39/€1 or beyond. Oil broke through $100 per barrel yesterday for the first time since the depths of the credit crisis on concerns over supply and Egypt, but bizarrely we did not see much risk related buying of the US dollar.

Elsewhere, Canadian GDP came in better than expected posting 0.4% gains against an expectation of 0.2% helped by higher demand from China for commodities in recent months.

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