Sterling set to strengthen?

With the Bank of England meeting on Thursday focus falls on whether we will hear any whispers surrounding the potential increase in quantitative easing where as interest rates should remain unaffected.

The pound edged higher against a weaker euro on Monday as investors focused on euro zone debt problems ahead of a meeting of European finance ministers who met last night facing pressures to increase the sixe of a €750 billion safety net for crisis-hit members with a view to halt a debt crisis in the single currency bloc.

This is followed by a meeting scheduled for today of ministers from the European Union, who are expected to formally approve the €85 billion euro aid package for Ireland and discuss the reform of EU Budget rules.

Sterling saw a 0.4% increase against the euro yesterday and the next 48 hours could be key in showing what direction we may see over the next few months and traders have already stated that the concerns over the stability of the euro zone would keep the single currency weak, which will likely benefit the pound.

This ongoing diagnosis could have been backed up by an IMF report that has been obtained by Reuters which said the euro zone should have a bigger rescue fund for member states in trouble. Germany was quick to reject such a move and dismissed calls for joint euro zone bonds.

Minutes of the last Monetary Policy Committee meeting showed that there was a three-way split in October and November, which does open the door to questions surrounding the outcome on Thursday.

"We expect the MPC to leave policy unchanged on Thursday, as we think there has been no material change in the risks to the inflation outlook that the committee has previously identified," said Simon Hayes, economist at Barclays Capital.

Australia’s central bank kept its key cash rate unchanged at 4.75% after its meeting finished overnight. The announcement was widely expected following a pre-emptive hike last month. Markets now expect the central bank to leave rates on hold for a few months to come. In making its statement, the RBA referred to the volatility in markets as a result of concerns about the creditworthiness of a number to European governments.

It also focused on the fact that the Chinese and Indian economies were showing more modest growth.

The US Dollar meanwhile has fallen across the board over night, falling to a three week low against the yen and sterling after being dragged down by further bond purchases talk. Last Friday’s disappointing US non-farm payrolls report is also weighing in the USD.

The tone for the day ahead seems to be more wait and see, with the dollar showing frailties and the euro zone on the edge, sterling could take the mantle and show some true signs of improving.