Inflation data to boost Sterling?

Good Morning.

The pound remained largely unchanged through yesterday’s trading session but we may see that change today with the markets anticipating change.

The CPI data is set for release at 09.30 and interest rates or moreover the pressure to raise will no doubt be making policy makers at the Bank of England scratch their heads.

Until now the BoE has been confident price pressures would be temporary, and a shift in that view would add to expectations for a rate hike

The report is expected to show an annual CPI jumped to 4% in January, well above the 2% target set to the Central Bank from the government. Focus will then move to tomorrow’s quarterly inflation report to see whether Mervyn King and the rest will still hide behind the pretence of being able to quash inflation towards the 2% target by next year, as previously pledged.

Any change in sentiment from these two reports could open the door to a rate hike soon which will likely boost the pound.

The euro was sold heavily across the board yesterday. The single currency fell to a three-week low against the dollar as it was hit by fresh worries about Europe’s banking system, which weighed on sentiment already depressed by concerns about euro zone peripheral debt.

These worries had led investors to reign in expectations of a near-term interest rate rise by the European Central Bank.

After coming under selling pressure for most of yesterday morning, falling to a three week low of $1.3429 against the dollar, the euro did manage to regain some ground in afternoon trading.

However it did struggle to hold onto gains overnight remaining on the back foot against the dollar and sterling for now.

The euro has also been hot by this morning’s release of disappointing French GDP data for Q4. Preliminary data show growth of 0.3% over the three month period, compared to forecasts for a 0.6% rise.

Growth figures from Germany also slightly disappointed, while Portuguese date released yesterday showed a contraction in the economy.

There was disappointment after yesterday’s meeting of European finance ministers failed to outline an extension of the existing facilities. They did agree, however that a permanent rescue mechanism to be set up from 2013 would total €500 billion.

It seems that everywhere you look, the euro zone has bad news piled on top of more bad news and the market watchers among us are now waiting for the rot to start in earnest, so sellers would be well placed to get out while the going is relatively good.