Sterling Higher on Growth Expectations

Our expectations of a quiet session were met yesterday, although we have seen some movements in the past 24hrs which require explaining. Sterling started the day in strong form, punching up towards the 1.59 level against the USD while making a 4 week high versus the euro. There was no real reason for the move so we will have to ascribe it to traders and investors believing that the raft of data due from the UK economy (today’s CPI, tomorrow’s BOE minutes and Budget, Thursday’s retail sales numbers) will all be positive for the pound.

CPI today is an interesting one to call. Expectations are that it will remain on a downward trend with the consensus view seeing inflation at 3.3% vs 3.6% last month, the lowest in 14 months. The key thing will be to gauge how much of an impact the increases in food and energy prices of late are having on the basket.

We saw the dollar fall on Friday as traders started to price out the belief that the Fed would tighten policy any time soon, following a disappointing CPI number; similar is likely for the pound today. From a wider, economic point of view whatever inflation prints at, it will still be way above the level of pay increases we have seen in recent months so people will still be feeling the pinch.
 
The single currency also managed to fly on yesterday versus the dollar, moving back into the 1.32s and fighting back in the afternoon session to take GBPEUR back below the 1.20 level on the day. The Greek CDS auction – finding out how much investors in Greek default insurance will receive – went well and was the main driver of this EUR bullishness, although it has faded a tad overnight on news that there will be a general strike in Portugal on Thursday.

Aussie dollar has also been taken lower overnight following the latest minutes from the Reserve Bank of Australia. The board saw “ample scope” for cutting interest rates should the situation worsen. BHP Billiton, the large Aussie miner, also warned yesterday that income from China is likely to fall this year as a mining tax was passed by parliament yesterday is likely to eat into profits.

There is little on the information docket today, UK inflation apart, although we do have the latest round of housing starts from the US at 12.30. Expectations are of 700k more houses through the month of February.

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Latest exchange rates at time of writing