Foreign Exchange: Pound Up Against US Dollar

With speculation that the Bank of England will raise borrowing costs from 0.5% by June, before the Federal Reserve raises rates, the Pound rose back above 1.63 against the US Dollar yesterday.

The Fed is expected to keep its benchmark rate on hold in a range between zero and 0.25% until 2012. This will continue to make the Pound a more attractive foreign exchange commodity against the US Dollar.

The UK currency pushed towards a high close to $1.6340 against the Dollar in European trading, but there was a sharp reversal during the US session, as the Pound retreated to lows below $1.62.

The Pound also slumped under 1.16 versus the Euro, amid reports that Bank of England policy maker Andrew Sentance will be replaced on the MPC after May.

As it was reported that Sentance will be replaced, the Pound came under immediate selling pressure as of course he has been pushing for an interest rate increase for the past nine months in a row and voted for a 50 basis point hike in February.

Sentance’s departure will affect the outlook for UK interest rates over the coming year, with analysts at Goldman Sachs predicting that the MPC will leave rates unchanged until 2012, despite persistently high inflation.

With speculation that the European Central Bank will raise interest rates before the Bank of England, the Pound sank to a low of 1.1580 against the Euro yesterday.

The Pound did receive a boost overnight after a report from the Royal Institution of Chartered Surveyors said that UK house prices rose for a fourth straight month in February, as demand increased. The number of estate agents saying that prices fell exceeded those reporting gains by 26 percentage points, down from 31% in January.

Recent economic data on the UK housing market has been mixed and somewhat confusing as the Nationwide Building Society reported last week that house prices rose in February, whilst the Halifax and Hometrack Ltd suggested that prices declined – an interesting set of statistics for the increasing number of people looking to move house this year.

Bank of England policy makers will convene again on Thursday and are expected to keep interest rates on hold at 0.5%. Whilst last month consumer prices hit 4%, the fastest pace of inflation in over two years, some policy makers still believe that a rate increase at this stage would be “self-defeating”.

EUR/USD

The Euro furthered gains against the Dollar yesterday, rising to a 4 month high above 1.40, after a report in the Euro-zone showed that investor confidence rose to the highest level in over three-years. That said there was a strong area of resistance which triggered a number of stop-loss buying orders.

The single currency also traded close to a 9 month high against the Yen.

Market Analysis provided with input from TorFX

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