Sterling gained against the euro and US dollar yesterday as another member of the Bank of England’s monetary policy committee voted for an interest rate hike. Sterling hit a high of $1.6272/£1 – the highest since Feb 3rd – after Bank of England Chief Economist Spencer Dale joined Martin Weale and Andrew Sentance in calling for higher interest rates to deal with stubbornly high inflation. Consumer Price Inflation currently stands at 4% and there has been increasing speculation that the Bank would increase rates as soon as May. Higher interest rates mean higher return for investors holding sterling based investments and as such, demand for sterling increases and the pound strengthens. However, a 0.25% increase in the next 6-12 months is already priced in, so sterling is unlikely to break beyond $1.63/£1 or €1.19/£1 without a major boost from some other economic data. This is the best GBP/USD price in nearly a year, so if you need to buy US dollars, now is a great time. Such is the nature of foreign exchange that we could feasibly see some poor economic figures released that reverses the view on interest rates and we will back in the mid-$1.50’s.

In the euro zone, the euro had a fairly quiet day – supported against the US dollar by recent comments by European Central Bank policy makers over inflation in the region. Talk of interest rate hikes contrasts with the Federal Reserve’s relatively loose monetary policy, and as such the euro has held firm despite some serious global uncertainty in the shape of unrest and uncertainty in the Middle East and North Africa. Out today, there is no real data but still a lot of scope for volatility.

In the USA, turmoil in Libya has seen investors look to the safety of US government bonds and the Swiss franc on fears that a spike in the price of oil could impact the global recovery. Oil jumped over $100 per barrel as Libyan oil production shut down and fears over Middle Eastern oil supplies left investors concerned. Released today we have unemployment claims and new home sales data so call in now for a live exchange rate.

Elsewhere, a former Chinese central bank adviser called on East Asian economies to form an alliance to deal with the USA, especially on issues such as the USA’s fiscal deficit. China plays a key role in currency, and could be a huge issue over the coming months, so it is certainly worth keeping an eye on.

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