International Foreign Exchange Report

Sterling fell on Tuesday as escalating political unrest in North Africa and the Middle East prompted investors to sell off risky assets and invest into safe havens. The pound was trading above $1.62 early in the session, however the risk aversion saw it slip to a 1 week low $1.6089.

"The enthusiasm for the pound has waned a little bit amid the search for safe havens, or at least the avoidance of risk currencies that do not offer upside on higher oil prices," said Daragh Maher, deputy head of global foreign exchange research, at Credit Agricole. Sterling had gained some support early on, from data showing Britain posted a bigger-thanexpected seasonal surplus on its January public sector net borrowing measure due to unusually strong annual growth in income tax receipts.

However aside from the political unrest in the Middle East, there were many other factors forcing investors to sell currencies perceived to be risky. Rising oil prices weighed on stocks and triggered profit taking on risky currencies. The Euro however was given a slight boost as European Central Bank policymaker Yves Mersch was quoted saying he would not be surprised if the bank sharpened its language on inflation. Sterling against the single currency after these Euro positives, down to €1.1793 from a session high €1.1925 The pounds losses were also put down to the risk associated with the BoE minutes due to be released today. BoE Governor Mervyn King said at a Feb 16th news conference that the MPC had seen a wider-than-usual range of views, though economists' consensus view is still for a repeat of January's voting pattern. The focus is now on whether a third MPC member will join Andrew Sentence and Martin Weale in voting for a rate hike. The February inflation report implied that interest rates would need to rise two or three times this year to maximise the chance of inflation returning to target. But with 2-year UK yields at 1.5 pct, the market looks quite stretched and is already being fairly aggressive. The initial impact of the speculation that rates may be hiked in the near term boosted investment in the pound, however analysts believe that this could leave sterling vulnerable to position adjustment, with the possibility of stalling the economy’s growth.

IN THE UK

• Sterling received early support as Public Sector Net Borrowing showed the sector was around £20bn better off MoM.
• Pound falls later on, risk aversion sets in after situation in Middle East worsens, dropping to a low of $1.6089 down from over $1.62 early on.
• Analysts await to see if a 3rd MPC member has joined the voting for a rate hike in the near term
• Rate hikes are generally seen as positive, however some investors believe they could stall economic recovery

ELSEWHERE

• The euro was helped yesterday after ECB member Yves Mersch made hawkish comments, in particular rising inflation and exit strategy, the euro strengthened to €1.1793 from €1.1925 against the pound
• Reports suggest that Portugal will have to seek a bailout in March/April
• Political unrest in North Africa and Middle East forces investors to dump risky assets and opt for safe havens, helping US dollar and gold.
• Rising oil prices weighed on stocks triggering profit taking on currencies perceived to be higher risk
• US consumer confidence figures showed a positive 70.4 figure, way up from the 63.0 consensus figure
• Against the dollar the euro moved from a low $1.3523 to a session high $1.37

DATA TO LOOK OUT FOR

• Headline data today is the release of the BoE minutes at 9.30am, if we see more than 2 votes for a rate increase the pound will rally
• Also at 9.30 BBA Mortgage Approvals will show how the UK housing market is shaping, buoyant housing data usually helps sterling
• In the US at 3.00pm, the US Existing Home Sales data is released, like the UK, good housing data will support the US dollar
• ECB’s Trichet speaks at 4.30pm, may discuss inflationary pressures, rate hikes and exit strategy.