GBP and the US Dollar this week.

Sterling rallied to a fresh 12-week high against the U.S Dollar on Thursday 3rd February while also making gains against the Euro towards £/€ 1.18. The catalyst for Sterling’s gains was another round of better-than-expected economic data. UK services industries returned to growth in January after the dipping into negative territory in December.

The gauge of activity in the services sector, measure by the forward looking purchasing managers’ index (PMI) , jumped to 54.5 in January from 49.7 in December, hitting the highest level since May 2010 and exceeding initial estimates. A reading above 50 indicates growth and the report, alongside positive manufacturing and construction PMI’s as well, will provide some optimism that the UK economy will bounce back from the fourth quarter slump.

Despite UK gross domestic product (GDP) falling to -0.5% in the three months to December, the buoyant pace of growth in key sectors of the economy will raise hopes that the UK economic recovery is still on track.

The VAT hike at the beginning of the year and government spending cuts are expected to hamper growth in the first quarter, but with inflation accelerating to 3.7%, speculation is intensifying that the Bank of England will have little option but to raise interest rates sooner rather than later.

Bank of England policy maker Kate Barker said that the Bank's failure to contain inflation is a setback to its credibility. The UK inflation rate has accelerated to almost twice the government's 2% target and has exceeded the upper limit of 3% for ten months in a row.

Her comments were met with cynicism in the market initially, but they could be interpreted that she may join Andrew Sentance and Martin Weale in recommending an interest rate increase to tackle rising inflation in next month's MPC meeting.

The Bank of England meets for its monthly interest rate announcement on Thursday and while policy makers are not expected to raise interest rates this month, a close vote should give Sterling some fresh impetus, especially if another member recommends an interest rate rise.

For anyone making Dollar-Sterling currency transfers, note that it could be another good week for Sterling with the 12-month high against the US Dollar, set at the end of October at £/$ 1.6298, under threat.