Sterling near 8-week high vs Dollar

Sterling rose against a subdued US Dollar on Wednesday, trading close to an eight-week high on the back of growing expectations of higher interest rates and steady buying by Asian central banks.

The pound has now gained nearly 2% in January as investors continue to price in expectations that the UK interest rates will rise before those in the euro-zone.

Inflation prices being again higher than expected in the UK yesterday added to the speculation that it may be a case of when and not if the Bank of England announce a change to the 0.5% interest rate that we have seen in the UK for the last 22 months.

The pound continued to improve against the US Dollar also, trading at a high of $1.6058 in the overnight and volatile session.

It has come back a little early this morning but many analysts are citing continued strength for the pound with $1.61 being possible.

Commerzbank have supported many market watchers’ opinions, “Inflation has worsened so that it will become increasingly difficult medium term for the Bank of England to resist a rate rise”, they said in a morning note.

It’s worth noting that any currency that sees a spike upwards like the pound has seen this week could be inline for a correction before marching forward again, so charts are likely to reflect a slight slump at some point soon.

The continued inflated inflation could put the BOE in a difficult position however. They have been promoter of a weak pound throughout the economic downturn, and even when things started to look better they stated that by keeping interest rates low the UK remain competitive in the exports market, which would likely attract overseas investment.

Higher inflation however deepens the policy dilemma of the central bank, as a rate rise in the near term may choke off the country’s economic recovery as government austerity measures kick in this year. Some analysts argue that the BOE is unlikely to raise rates in the coming months as a result, further worsening its credibility with markets as price risk ratchet higher.

As this article is being written, British labour market data has been released and the UK Claimant count was as expected 4.5% and has done little to move the market.

Sterling’s overall outlook seems positive, with latest rates against the Danish Krone, Arab Emirate Dirham, Australian Dollar and the South African Rand touching 3 month highs.