Sterling Up as Euro and Dollar Fail to Impress

The pound has started its day well after yesterday’s comments from MPC member Andrew Sentance talked up sterling when he made reference that supported a rate hike, which would assist sterling as inflation needs to be offset.

There was robust economic data also, with British Factory orders improving more than expected in February and firms expected to put up prices at their fastest pace in 21/” years, the CBIs monthly industrial trends survey showed on Thursday.

The pound had weakened by around 2 cents from the high on Wednesday as the Bank of England’s inflation report downgraded the 2011 growth forecasts as Mervyn King took a less hawkish tone than the market had been anticipating.

Sentance has been GBP sellers’ main man over the last few months as he has been calling for a rate hike since 2010 and said the central bank’s latest economic forecasts underestimate upside risks to inflation, and interest rates need to rise faster that markets expect to bring it back to target.

Implied rates, based on interest rate futures and swaps, are pricing in a quarter percentage point rate hike in June (rather than May) and another in October.

Sentance claims that raising interest rates now would be a rise in the value of the pound. This should help offset the rising costs of imported commodities, which have helped in driving inflation to double the BoE’s 2% target.

The US Dollar Market was relatively quiet overnight after the dollar had come under some pressure yesterday on the fall in US Treasury yields.

The surprisingly large increase in initial jobless claims signalled wages were unlikely to pick up any time soon, reducing expectations of a rate hike by the Fed this year.

This coupled with benign inflation data in the US reinforced expectations that the FED will leave interest rates on hold for some time yet. Frustratingly for watchers the market appeared to shrug off a much better than expected Philly Fed Index.

Indeed the dollar couldn’t even play its safe-haven card as the Greenback was generally out of favour, the continuing Middle East tensions saw strong demand yesterday for non dollar safe haven currencies. Notably, the Swiss franc rallied strongly, once again providing to be a major beneficiary on increased geopolitical risk

Federal Reserve chief, Ben Bernanke will be speaking in Paris at 13.00 (UK) today ahead of the G20 meeting of finance ministers and central bankers on Friday and Saturday.

Traders however, are not expecting much from the meeting form a currency market point of view.

It has been reported that Germany will support Portugal if it faces difficulty in funding itself in financial markets, although Finance Minister Wolfgang Schaeuble did say that it is not in a state of emergency…yet?

Schaeuble commented in an interview with the Nikkei that Germany would remain amenable to further aid for debt-laden euro-zone members provided they agreed to structural reforms such as cutting public pensions.

Portugal has thus far managed to fund itself but the cost of borrowing is now close to or at record highs and is becoming increasingly punitive.

The single currency has been largely range-bound all week against a basket of currencies, as the middle-eastern problems, and the ever looming euro-debt crisis hanging over the continent seemingly not going away, it seems that the euro is ready and waiting for a change in direction.

Next week’s German IFO report should provide some insight into where the market will be moving, and will be sure to kick off a busy week on fundamentals.