Macro factors

Posted by Scriptaty | 8:58 PM

Renewed weakness in the U.S. dollar, which saw the euro push to all-time highs in the $1.30 area, have helped support sterling in recent weeks, analysts say.

Another factor that supported the pound from mid-October to early November was reserve shifting from dollar assets into the pound by the Bank of India. However, Rogers notes as of mid-November they stopped buying sterling.

The key question for forex traders is: what will the end of BOE rate hikes mean for the pound, which has been stuck in a narrowing consolidation? From an interest-rate differential standpoint, Credit Suisse First Boston’s Stephansen notes “the ECB [European Central Bank] hasn’t begun hiking yet. Since the BOE is at the end of its tightening cycle, this policy divergence could bring a correction to the sterling.”

ECB left rates steady at its early November meeting at 2.00 percent. ECB President Jean Claude Trichet highlighted improvements in economic strength in the euro zone area, but warned about the negative impact from higher oil prices. The ECB’s only mandate is to ensure price stability.

The inflationary impact from stronger energy prices could move the central bank to raise rates there.