GBP and the Australian Dollar this week

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Inflation continued to track higher according to new data released yesterday. The consumer price index (CPI) was 4.0% higher than January 2010, with retail prices (RPI) rising at 5.1%. The data added further fuel to the case for an interest rate rise  after a release last week showing that producer input prices rose 13.4% year on year (1.7% month on month), the highest yearly rise since late 2008. That news came after the Bank of England meeting on Thursday at which policy makers kept interest rates on hold at 0.5%.

Price rises of this magnitude will surely force the Bank of England to pull the interest rate trigger soon. A rise in May is now more than 50% expected according to interest rate futures markets.

This week the Bank of England 's quarterly inflation report is on Wednesday morning at 10:30am. Governor Mervyn King will give a speech which should give the markets an update on the latest policy thinking taking into account the most recent data. The market will be paying close attention to any comments on wage growth. To date, wage growth has been restrained. Any sign of rising real wages could indicate the start of an inflationary spiral which would remove the Bank of England's ability to keep rates on hold.

Meanwhile, in Australia the Reserve Bank of Australia (RBA) indicated in the minutes from this  month’s meeting show there will be no further interest rate rises in the short term. The current cash rate stands at 4.75% and was last raised by 0.25% in November 2010. Subdued growth in consumer spending coupled with lower than expected inflation figures gives the RBA plenty of room to sit on the fence for now.

The Australian Dollar was relatively stable on the RBA minutes, but Sterling reacted positively to the UK inflation data. After intially dipping, Sterling strengthened through the rest of yesterday’s trading.

Sterling is now testing the £/AUD 1.6200 level that marked the high in January 2011. If Sterling can close decisively above this level, there is scope for a continuation towards the next resistance level around £/AUD 1.6400.

It is too early to speculate on whether we are seeing a trend reversal, but given the relative inflation and interest rate outlooks (RBA now on hold and BoE under pressure to raise rates) Sterling is probably in a better place than it has been for some time.