Market news

21 February 2011

Forex: Weekly review

Sterling advanced this week, hitting a five-month high on a trade-weighted basis as speculation mounted that the Bank of England would move to raise interest rates in the coming months.
Expectations that the Bank would abandon its ultra-loose monetary policy stance heightened on Tuesday as figures showed UK consumer price inflation rose to 4 per cent in January, double the central bank’s target rate.
This prompted Mervyn King, Bank governor, to write a letter to the UK government to explain the rise. Many investors took the note as an endorsement of the three 25 basis-point interest rate rises that are priced into the market.
Mr King denied he had given the green light to rate rises on Wednesday, saying he never pre-announced a decision on interest rates and investors had got ahead of themselves. But the rally halted only temporarily.
Indeed, the pound continued to climb on Friday as UK retail sales beat forecasts and as speculation mounted that a growing number of members of the Bank’s nine-strong monetary policy committee viewed a strong currency as a weapon that could stem inflationary pressure.
Sterling got an added lift as rumours circulated in the market that the minutes of this month’s MPC meeting, due on Wednesday, would show another member had joined Andrew Sentance and Martin Weale in voting for a rate rise.
Over the week, the pound rose 1.4 per cent to $1.6228 against the dollar, climbed 0.8 per cent to £0.8398 against the euro and was up 1.3 per cent to Y135.23 against the yen.
The dollar fell 0.6 per cent to $1.3628 against the euro over the week.
The Swiss franc advanced, with the currency’s strong performance put down to haven demand amid Middle East unrest.
But others said the Swiss franc’s rise reflected comments from Phillipp Hildebrand, president of the Swiss National Bank, who said Swiss interest rates could not remain low indefinitely given rising inflation. Ulrich Leuchtmann at Commerzbank said this eased concerns that the SNB would intervene to stem the strength of the Swiss franc.

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