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Posted February 18th, 2011 by Charles Purdy

EUR/GBP Rate & Comments for 18th February 2011

EURO/GBP - 1.1930

The rollercoaster ride for sterling continued yesterday, as a speech by Bank of England policymaker Andrew Sentance reignited speculation over interest rate hikes. As a result, sterling strengthened back up against the US dollar and euro. Sentance, who has been calling for an interest rate hike since June 2010, made it clear that there are numerous risks that will add to inflation and as such, interest rates need to rise faster than many think in order to filter through to the real economy and keep inflation on target. The constant back and forth over interest rate expectations is causing sterling movement on a day by day basis as sentiment shifts between swift interest rate hikes or no action from the Bank of England. Any feeling that interest rates will rise soon sees sterling strength and expectations that policy will remain unchanged will see sterling fall. Today, there are retail sales and mortgage data which is potentially market moving. Next week, the Bank of England’s minutes from last week’s meeting will be closely watched.

In the euro zone, reminding us that inflation is not just an issue faced by the UK, German producer price (or “factory gate”) inflation has shown a 1.2% jump on the month – far more than the modest 0.6% gain that was expected. Unlike the UK, wage inflation is on the up – driven by union demands within the auto-manufacturing sector. This brings the possibility of an interest rate hike in the euro zone into play and as such, risk appetite for investors has already improved. Call in now for a live exchange rate.

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