FOREX NEWS-Pound hurdles $2 as inflation rises, euro eyes highs

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Tuesday April 17, 2007 - 10:47:27 GMT
Reuters - www.reuters.com

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FOREX NEWS-Pound hurdles $2 as inflation rises, euro eyes highs
FOREX-Pound hurdles $2 as inflation rises, euro eyes highs
Tue Apr 17, 2007 6:33am ET161

(Updates price, adds quotes, changes byline)

By Veronica Brown

LONDON, April 17 (Reuters) - Sterling finally hurdled the psychological $2 barrier to hit a 15-year peak against the dollar on Tuesday as UK inflation topped 3 percent, while robust German investor sentiment kept the euro well supported.

The pound unlocked the $2 barrier -- last seen just before Britain exited the pre-euro Exchange Rate Mechanism in 1992 -- as data showed consumer prices had accelerated to 3.1 percent in March, its highest since comparable records began in 1997. This has cemented expectations for a May interest rate hike to 5.5 percent and priced in the possibility of more.

"We now see a May rate hike as a highly likely scenario and I think if the numbers continue to come in strong in the UK, you will see market participants starting to debate how much more we're going to see from here," CIBC World Markets European economist Audrey Childe-Freeman said.

Strength also ran through Germany's ZEW index, which showed sentiment among German investors on the outlook for Europe's largest economy improved by more than expected in April, firming expectations for more euro area monetary tightening.

"The ZEW rally signals that business optimism is back in much stronger shape after the sharp 2006 downturn. Current conditions have surged to a new all-time record high, underlining the renewed vigour in the economy," Bear Stearns International economist David Brown said.

By 1020 GMT, sterling stood at $2.0006, having hit its highest in 15 years at $2.0014 . The euro was steady at $1.3535 , after hitting the two-year high of $1.3576 on Monday.

The European Central Bank's euro trade-weighted index hit a two-year high on Monday .

The euro was down 0.3 percent at 161.48 yen after hitting a record high of 162.42 on Monday. The dollar was down 0.3 percent at 119.30 yen .

US DATA ALSO EYED

U.S. consumer price figures and housing starts data later in the session could help discern whether price pressures are rising even as the housing market keeps slowing, which may have a negative impact on the economy.

Analysts have said that sterling and the euro could benefit further if the U.S. data comes in softer than expectations, as the single currency eyes a record at $1.3670.

Core CPI is expected to climb 0.2 percent on the month, matching February's gain, according to a Reuters poll.

"While USD would clearly react negatively to a downside surprise on the core index, it is not clear that there is much upside for USD on the back of a higher reading," Royal Bank of Canada said in a note to clients.

"U.S. rate markets still price in an 80 percent probability of a rate cut by the end of this year and fully discount a second cut in 2008 H1 and any scaling back of these expectations could hit U.S. equity markets," it added.

© Reuters 2007. All Rights Reserved.

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Tuesday April 17, 2007 - 10:47:27 GMT Reuters - www.reuters.com