Sterling rallied to a 13 month high against the US Dollar on Tuesday after stronger than expected UK economic data fuelled speculation that UK interest rates will rise well before those in other developed economies. Hawkish comments from Bank of England that inflation will remain high this year helped support the Pounds movement, reaching a high of 1.6328 in intra-day trading and a low of 1.6255 which now acts as support. Speculative traders are continuing to ‘short’ the US Dollar at present, mainly due to the dovish comments from Mervin King with regards to Interest rate expectations going forward.

Fundamental news out from the UK on Tuesday includes Mortgage approvals which increased 45.7K in January amid forecasts for a 42.9K rise, while consumer credit unexpectedly slipped GBP 0.2B during the same period after expanding a revised GBP 0.8B in the month prior. As private sector activity remains frail and fundamentally vulnerable, the Bank of England may continue to support the real economy throughout the first-half of 2011, but there could be a growing shift within the MPC as the central bank struggles to balance the risks for the economy whilst coming to an agreement on Interest rate expectation going forward.

Looking at the higher yielding currencies the AUD still continues to be a key performer in the FX market. Although the Aussie has been essentially range bound between 1.5765 -1.6285 for the first part of 2011, it has nevertheless been a fascinating tug-of-war between the bullish and more cautious bearish speculative traders.

Price movement this morning remains mixed, however a surge in commodities has caused a wave of risk aversion in the markets with an unwinding of riskier assets, this has alternatively weighed down on the higher yielding currencies. GBP/AUD opens up 0.12% higher on the day, supported over the key 1.60 psychological level. GBP/NZD still holds a relatively strong correlation to risk and continues to attract the ‘bulls’ as price movement makes a run to test the all important 2.20 level. Any dovish comments from the Reserve bank will further test short positions building against the NZD however any buyers should be aware the NZD has become increasingly overbought.

There is much for markets to focus on today. As well as Bernanke repeating his testimony, key data releases include the eurozone producer prices report for January, as well the ADP employment report for last month. This should provide some insights on the US labour market ahead of Friday’s official payrolls number. The Fed is also due to release its Beige Book, which will form the basis for discussion at the next FOMC meeting.

Market Commentary by Tom Trevorrow

FX Trader