The US dollar faced some heavy selling pressure as fears over the European debt crisis abated. Sterling benefited from the euro’s rise against the US dollar. Currency markets are expected to remain in a holding pattern in the coming days.

Sterling

The central bank maintains that higher inflation levels in the UK are transitory and that inflation will come back in line with the central bank’s target. The less hawkish tone being taken by the Bank of England could damage sterling in the short term. This arrives on the back of worse than expected retail sales figures which showed a fall of 0.8 per cent in December.

US dollar

There has been talk about the troubled state of several municipalities in the US as well as the deficit ceiling, which could be hit in the coming weeks. Finances in several states are strained and while states are not permitted to ask the federal government for help, municipalities are able to call upon the government.

Euro

The euro achieved a nine-week high against the US dollar, a two-month high against the yen and a 1-month high against the Swiss franc. The euro continued to make gains after the German IFO business sentiment rose to a 20-year high. While the euro remains at the upper end of recently traded ranges, the withdrawal of a junior coalition party in Ireland’s government prompted the Prime Minister to step down and call for elections in the second week of March, encouraging a bout of profit taking in long euro positions.

Japanese yen

The yen’s direction continues to be influenced by speculation over Chinese policy. The Chinese government continues to take steps to cool an over heated property market, which is weighing on the growth outlook. Tighter policy in China tends to damage the yen.

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