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Today's Currency Insight - Pound Rallies on Interest Rate Expectations

February 16, 2011 - Written by John Cameron

In the UK, yesterday’s annualised CPI inflation figure came out at 4.0%, as anticipated. This is double the government’s stated target of 2.0% and represents the highest level of inflation in Britain since November 2008. The figure meant that Bank of England Governor, Mervyn King, had to write a letter of explanation to Chancellor George Osborne, in which he stated that inflation was likely to hit 5% in the near future and that it was ‘about as likely to be above the target as below it two to three years ahead’. These comments, predicting high residual levels of inflation, make it highly likely that the Bank of England will raise rates sooner rather than later. The markets will pay close attention to the tone of this morning’s Bank of England Quarterly Report for hints on the timing of any tightening in monetary policy.

Expectations of a UK interest rate rise continue to prop up the Pound, however UK employment figures for January, which are released at 0930hrs this morning UK time, could dampen these expectations if they show a softening in the UK labour market.

The Euro suffered further losses yesterday as a series of growth figures for quarter 4 of 2010 were released. The German, French, Greek and ‘whole of Eurozone’ figures all came out below anticipated levels to raise fears that austerity measures in Greece, Ireland and other states are having a knock-on effect on the pan-European recovery.

Elsewhere, Chinese annualised inflation figures for January came out at 4.9% versus expectations of 5.4%. Ostensibly, this figure should reduce the pressure on the Chinese Central Bank to raise interest rates again in the near-term, however analysts have pointed out that China’s National Bureau of Statistics have re-formulated the way the CPI figure is calculated since it was last released in order to give less weight to food prices. Rising interest rates in China have hurt other Asian currencies including the Indian Rupee, Singapore Dollar and Hong Kong Dollar.

Retail Sales numbers for January were the highlight of a busy day for data in the US yesterday. These figures showed that US consumer spending rose for the seventh month in a row. However, the monthly rise of 0.3% was lower than expectations of 0.5%. S&P Futures point to a positive performance for US Equities during today’s session, leaving the Dollar susceptible to an increase in the appetite for risk.
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