FOCUS Pound sets sights on 2 usd level as key week unfolds

FOCUS Pound sets sights on 2 usd level as key week unfolds

	Published : Mon, 16 Apr 2007 14:54 By : Agencies Print this Story

LONDON (Thomson Financial) - The 2-dollar mark came firmly into view today as the pound enjoyed a boost from strong UK economic data and looked to more of the same as the data-heavy week unfolds.

The UK currency started the day on a strong footing as a forward looking indicator of the property market showed unrelenting strength, contrasting nicely with the faltering fortunes of the US housing market. A forecast beating rise in factory gate prices followed, pushing the pound above the 1.99 usd to a 15 year high of 1.9940 usd.

A combination of robust UK data and weak US equivalents have been supporting the pound but so far there has not been enough momentum for a push above 2 dollars - a level not seen since the pound was forced out of the Exchange Rate Mechanism on Black Wednesday in 1992.

This week, however, presents a good opportunity, argued Martin Slaney, head of spread betting at GFT Global Markets.

'Momentum is certainly with the pound right now and there's every chance that the higher volatility we are likely to see this week will take us above 2 usd,' he said.

The needed lift could come from UK data this week.

Daragh Maher at Calyon believes the market is likely to push for a 2-dollar handle, and that this may also be the catalyst for some overdue correction in the pound's value against the euro.

'Quite how far the rally in the pound can be extended will hinge on tomorrow's inflation data and on Wednesday's minutes of the Bank of England's last rate setting meeting, both of which we expect to prove supportive,' he added.

Data out tomorrow is predicted to show inflation, as measured by the CPI annual rate, edging up to 2.9 pct in March from 2.8 pct in February, remaining way above the Bank of England's 2.0 pct target. Analysts believe lower retail gas prices will be offset by the rise in petrol prices over the month.

Meanwhile on Wednesday the minutes of the BoE's rate setting deliberations are predicted to show a definite slant towards a rate hike, even though the central bank chose to leave interest rates unchanged at the near six-year high of 5.25 pct earlier this month.

If the vote for no change in April proves to be close, there is every reason for the pound to rise.

Many analysts feel there is a good chance of a three-way split in April, with one vote for a cut from arch dove David Blanchflower and votes for a hike from twin hawks Tim Besley and Andrew Sentance while the rest opting for no change.

If any in the middle group, which includes BoE governor Mervyn King, are revealed to have voted for higher borrowing costs the pound could soar.

Markets are fully priced for a quarter point hike in the benchmark rate to 5.50 pct in May, although opinion is divided beyond that.

BNP Paribas analysts pointed out that the strength of recent data releases has reduced the significance of Wednesday's minutes.

'Even if it would reveal a three way split vote the market would continue betting for higher rates. The question coming up now is if rates have to go beyond the 5.50 pct rate assumed for May,' they added.

'Our once ambitious call for cable to reach and exceed 2.00 in now within sight.'

Data from the other side of the Atlantic is also crucial. Today's US retail sales rate for March came in too close to predictions to move the market. But further tests lie ahead this week.

Among them, tomorrow brings US retail inflation data for March, which is seen rising 0.7 pct, as measured by the Labor Department's Consumer Price Index. Excluding volatile food and energy prices, 'core retail inflation' is seen rising 0.2 pct.

And, while the pound is likely to stay well bid around 1.99 usd, it may well take the right combination of UK and US data to push the currency above 2 usd this week.

Steve Barrow at Bear Stearns is confident the level will give.

'It's probably more a question of 'when' not 'if' cable scales 2 usd,' he said.

In a year's time he expects the pound to have scaled the heights of 2.10 usd.

By Sivakumar Sithraputhran; sivakumar.sithraputhran@thomson.com

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