The Pound gained over 1% against the US Dollar, the Japanese Yen and the New Zealand dollar and was significantly up against many other highly traded currencies today. This come as the Bank of England Monetary Policy Committee member Martin Weale said that Britain should increase interest rates. Weale attributes much of the inflation in the UK economy to a weak Pound and believes that by increasing the base rate, price pressures will recede.
Sterling was not the only currency to make strong gains today as strong inflation was reported in Europe which put pressure on the ECB to increase interest rates. Consumer prices in Europe were higher than expected in January and climbed to 2.4%, increasing from 2.2% in December. As both Europe and Great Britain emerge from recession there are clear inflationary pressures creeping into the respective economies. While there are signs of weakness in both recoveries, the pressure to increase interest rates is apparent.
This comes as political turmoil in the Middle East was expected to cause investors to take fright today, sell out of risky assets and buy into the US Dollar and Gold. This changed very quickly as soon as the comments by Weale and the inflation data in Europe were released. This demonstrates how much a future change in interest rates can impact on the currency markets.
This week ahead will be a quiet one for Sterling on the data front, with no real key data releases scheduled. Over in the USA the nonfarm payrolls report, released on Friday is expected to show an increase of 150,000 at work over the past month. Unemployment data is also released on Friday and is expected to show a modest rise. Any release more downbeat than this will weigh on the Dollar. The US Fed’s chairman Ben Bernanke speaks on Thursday and this will be keenly watched by the markets.
The European Central Bank meets on Thursday to set interest rates. No change is expected but the tone of the press conference afterwards will be of interest, especially with regard to today’s inflation data. The Reserve Bank of Australia meets overnight as well. Also due out tonight is the Chinese manufacturing Index for January. This figure is keenly watched as it closely impacts on the New Zealand and Australian economies, both of which have highly traded currencies
