In a week that has prominent event risk for nearly every one of the majors, the sterling is arguably looking at the most ominous wave of releases. This past week, the Bank of England announced its decision to keep the benchmark lending rate unchanged and the bond purchasing program at 200 billion pounds as expected without a disarming statement to give insight into the reasons behind their assessment. This would be a non-event were it not for rampant speculation by market participants that the central bank will be forced to respond to unmanageable inflation. These rate watchers will be presented with definitive data that will either justify or dispute their hawkish expectations.
The euro came under some selling pressure versus the dollar overnight before recovering some ground on a general pick up in market sentiment, though it has started the week largely unchanged from Friday’s closing levels. Although finding some support in talk that the ECB will be ahead of the Fed in terms of hiking interest rates, markets are still cautious on the single currency given the overhang of sovereign debt concerns and uncertainty about the ECB’s successions plans now that Alex Weber (Bundesbank head) is no longer in the running for the job of president of the central bank.

The dollar, meanwhile lost some ground versus the yen overnight on reports of aggressive selling from Japanese exporters to settle accounts but downside pressures were seen as limited. Data released over the weekend showed speculators increased their bets against the dollar to their highest level since October of last year in the week ending 8th February – a clear signal the USD is expecting a large correction.

With the general improvement in sentiment in the market after the weekends events in Egypt, as well as the expectations that the Bank of England remains on a course that will lead to tightening, Sterling is already gaining against the US Dollar and the Euro in early morning trade. This week will prove testing for the Pound particularly with the growing uncertainty over the outlook for UK monetary policy. Financial markets will be paying close attention to the tone of Wednesdays quarterly inflation report with a host of other key economic data including the latest CPI, retails sales and labour markets report also providing some direction. With the market positioning itself for a May rate hike, the data will be scrutinised for any evidence of “second round” price effects.

By Tom Trevorrow