Foreign Exchange: Pound Rises But Struggles To Maintain Momentum

The Pound rose against the majority of the major currencies yesterday, helped by accelerating inflation rekindling the prospect that the Bank of England will need to lift the base rate above 0.5%.

The Pound consolided above 1.16 versus the Euro and traded close to the 1.60 level against the US Dollar.

Elsewhere on the foreign exchange markets, the Pound also rallied strongly against the Yen, after Japan’s credit rating was cut for the first time in nine years by Standard & Poor’s, as persistent deflation and political stalemate undermine efforts to reduce the nation’s debt levels.

UK 10-year government bond yields traded close to the highest level in eight months, amid concern that rising inflationary pressures will lead the BoE to raise interest rates. Britain’s debt agency sold more inflation-linked debt than earlier anticipated at an auction yesterday, as investors sought protection from rising prices.

Overnight the Pound slipped below $1.59 against the US Dollar after a report showed that UK consumer confidence plunged by the most in almost 20-years this month.

Household spending has been reined in because of the hike in VAT and rising unemployment, amid the most aggressive public spending cuts in a generation. Many Brits are now struggling with debt as outgoings exceed their income.

Both the government and the Bank of England are warning us of a “choppy” recovery this year, but with the key components of the economy slowing, there is increasingly concern that the UK will endure a second recession this year.

The Pound is struggling to gain momentum against the majors and has fallen 0.4% against the Euro from the close position last night.

EUR/USD

The Euro continued to trend higher against the US Dollar, helped by the French President Nicolas Sarkozy pledging support in defending the single currency. European Central Bank member Lorenzo Bini Smaghi said yesterday that policy makers can no longer ignore imported inflation, while the chairman Jean-Claude Trichet said that the ECB will do what is necessary to ensure price stability.

The Dollar rose against most of the 16 most actively trading currencies yesterday, as a decline in Asian stocks helped boost demand for safe haven assets.

US gross domestic product rose at a 3.5% annual pace, up from 2.6% rate in the previous quarter, driven by the biggest gain in consumer spending in four years. Elsewhere, a separate report from the University of Michigan is expected to show that consumer sentiment fell in January, as fuel prices continued to rise, while labour costs rose at a faster pace in December.

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