The Pound has made gains today across the majority of the most actively traded currencies. Gains can be attributed to improved sentiment driving the market. For the last couple of weeks the pound has suffered from negative sentiment caused by very poor Q4 GDP figures for 2010. The reversal has however been driven by last week’s better than expected UK manufacturing and services sector news. Markets are also guessing that interest rates in the UK could rise sooner than previously expected with potentially three incremental rises in 2011.

The Pound has consolidated its gains in trade this afternoon as investors become coy ahead of the BoE rate announcement. Markets widely accept that it is unlikely that the Bank of England will make any adjustments to current monetary policy. If this is the case, traders focus will then shift to the minutes at the end of the month to help second guess when we might see the first interest rate hike of the year. Most analysts predict that the Bank of England will adopt a ‘wait and see’ approach and wait until May for the Q1 GDP figures for 2011.

Inflation in the UK remains a risk and is the reason for heightened interest rate expectations. Inflation is expected to continue to rise in the short term and could pose a significant threat to the UK economy if not dealt with properly by the Bank of England. The problem is however that any rise in interest rates could put the stoppers on the UK economic recovery and trigger another recession. The Bank of England therefore faces a very difficult task in balancing the risks to economic growth with inflationary pressures.

The Euro has suffered in the last week with the S&P downgrading Ireland’s credit rating. This has fuelled ongoing concerns of Sovereign Debt contagion throughout Europe. The GBP/EUR pair has jumped from a low of 1.1531 on the 26th January to 1.1920 in trade today. This 3.5% move is a significant recovery and could see a subsequent upward move with sufficient momentum through the psychological 1.20 level.

Factory orders in Germany weakened for the first time in three months today. Demand slipped 3.4% in December almost 2% worse than expected. A slowdown in Germany will drag on the Euro exchange rate as investors see this powerhouse as part of the Euro’s core strength.

The Dollar has seen mixed price action today, most traders expect the market to consolidate yet remain above the psychological 1.60 level. Similar to the expectation on GBP/EUR we would expect GBP/USD to rally if we see an indication that the Bank of England will normalise monetary policy with a series of interest rate hikes this year.

If you have a currency requirement or have any questions or queries with with reference to the markets please don’t hesitate to contact me.

Best Regards
Luke Zorab
Torfx Currency Analyst

“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.”