Markets at the moment are being heavily dominated by monetary policy expectations on interest rates. This is being driven by mounting inflationary pressures seen both in the UK and in the Euro-Zone. Many economists are arguing that the current high inflation levels are short term and that price pressures will decline over the next 6-12 months. However at present this does not seem to be dampening appetite from day traders speculating on European interest rate policy.

Yesterday saw inflation figures from the Euro-Zone and gave indication that inflation has advanced to 2.4%. Ireland’s central bank lowered its 2011 projections for growth from 2.4% to 1%, they have also lowered their inflation target with the view that the significant slack in the market will dampen underlying price pressures in the market.

In light of recent news events we may see the Euro rally further against the US Dollar with potential for a retest of the 1.40 psychological resistance level. The drop in risk appetite in the markets could however hinder this retest as market direction at the moment seems to very much be dictated by market sentiment.

Sterling rallied to a high of 1.6155 in trade this afternoon as the Bank of England maintains a hawkish outlook on inflation. Martin Weale has stated that there is good cause for a modest rise in interest rates, his opinion is that the consequences that the UK economy will face for a small rate rise are far outweighed by the benefits of avoiding problems with future inflation.

The GBP/USD pair at the moment looks bullish with a extension of the rally seen this afternoon expected overnight. In the coming weeks however the GBP/USD pair is expected to trend sideways moving into February.

Sterling has gained today on news that UK manufacturing has expanded at the fastest rate since the Chartered Institute of Purchasing and Supply records began in 1992. The factories index surged to 62 from a revised 58.7 in December as domestic and export demand has boosted orders. This figure has helped improved sentiment in UK markets after poor last quarter growth figures from last year.

UK stocks have rallied today on the news that the manufacturing sector has gained more than expected, copper has rallied to a new all time high and the FTSE is trading at 1.62% up on the day.

If you have a currency requirement and would like to discuss the markets please don’t hesitate to contact me.

Best Regards
Luke Zorab
Torfx Currency Dealer

“Any opinions expressed in this document are those of TorFX analysts. Any analysis and/or forecasts provided are aimed at helping clients understand market conditions and developing trends. Clients are wholly responsible for their own trading decisions.”