Sterling strengthens due to inflation jump

Published: 16 February, 2011

Sterling strengthened against both the US dollar and euro yesterday following another jump in consumer price inflation in the UK.

Currency rates

EURO/GBP - 1.1930

US$/GBP - 1.6169
CHF/GBP - 1.5570
CAN$/GBP - 1.5968
AUS$/GBP - 1.6188
ZAR/GBP - 11.8497
JPY/GBP - 135.328
HKD/GBP - 12.6005
NZD/GBP - 2.1462

SEK/GBP - 10.4309
US$/EURO - 1.3550

The figures showed that inflation hit 4% - up from 3.7% in December - giving rise to more and more speculation over interest rate hikes over the coming months. Financial markets had been pricing in an interest rate rise towards the second half of the year, but many feel there could be a hike as early as May. This saw sterling hit a high of $1.6169/£1 and €1.1963/£1 against the US dollar and euro on heavy buying. The Bank of England releases the latest Quarterly Inflation Report tomorrow which could see upward amendments to inflation expectations. If this happens we are likely to see sterling strengthen even further and break over €1.20/£1 and $1.63/£1.

In the euro zone, the single currency slipped yesterday to the lowest level against sterling in 4 weeks as rate hike expectations boosted sterling and European data disappointed. GDP figures for the region showed that the economy grew by 0.3% against an expectation of 0.4% which didn't help. In addition, German economic sentiment undershot expectations - highlighting the fragility of the region. Tomorrow is a relatively quiet day for European data but could see debt crisis related volatility.

In the USA, the US dollar underperformed against the euro for the first time in four days yesterday as risk appetite saw the single currency benefit, but many analysts still expect the euro to suffer. Retail sales data for the US disappointed, showing growth of 0.3% against an expectation of 0.6%. This saw the US dollar fall marginally, but it held above an 8 week high against the Japanese yen as US government bond rates make US dollar holdings more attractive against Japanese holdings.

Elsewhere, the Australian dollar fell overnight as Reserve Bank of Australia Governor Glenn Stevens stated that interest rates were above average and that the central bank would not be raising rates for some time.

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