Sterling strong on interest rate expectations

15th February 2011
Good morning. Sterling held fairly steady yesterday ahead of UK inflation data and the Bank of England's quarterly report. Rates vs the Euro hovered around €1.19 all day, with expectations for an interest rate rise in the near term providing strong support. At 08:30am this morning rates are as follows:

Sterling strong on interest rate expectations

In the Eurozone investors have reigned in expectations of an interest rate rise in the Eurozone, and this is keeping the Euro weak and cheap to buy. In contrast it's expected the Bank of England will raise rates by mid year, and it's this expectation that's keeping Sterling strong at the moment.

Inflation data today is expected to show a figure of 4% which is well above the BoE's target of 2%. If we keep getting high inflation figures then calls will continue for the BoE to raise rates sooner rather than later.

Until now the BoE has been confident price pressures would be temporary, and a shift in that view would add to expectations for a rate hike.

Analysts warn Sterling may weaken in the near term

There are concerns about weakness elsewhere in the UK economy and further data this week, including jobs data tomorrow and retail sales figures on Friday will also be closely watched by the currency markets.

The economy contracted in the fourth quarter of 2010 and concerns are growing that job losses will mount, hurting consumer spending at a time when the government is cutting spending.

"This combination of higher inflation and lower growth will be a medium-term negative for sterling. Hence, we expect any sterling gains to prove unsustainable

Today's Data

A very busy day for data. We have lots of UK data; Gross Domestic Product, Consumer Price Index, House price info and Retail Sales. Lots here that could affect the value of Sterling against other currencies.

For the EU we also have GDP along with Trade balance figures and economic sentiment. Expect GBP/EUR volatility today. From the US we have Retail Sales and inflation measures.

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