FOREX-Pound, Aussie surge on rate expectations, euro steadies

Wed Jan 22, 2014 8:08am EST

Related Topics

* UK jobs data drive sterling higher

* Australian dollar jumps as inflation pares rate-cut risk

* Yen briefly blips higher after BOJ stands pat as expected

* Bank of Canada meets after rough month for Canadian dollar

By Patrick Graham

LONDON, Jan 22 (Reuters) - Sterling and the Australian dollar both surged on Wednesday after data releases that spoke for a tighter approach to monetary policy despite doubts over the solidity of growth in both economies.

UK unemployment slid to within a whisker of the level at which the Bank of England has said it might consider a rise in interest rates, driving sterling - the best performing major currency of the past six months - another half a percent higher against both the euro and dollar.

The largest quarterly rise in inflation in over two years meanwhile put paid to expectations of further cuts in rates in Australia and helped the Aussie gain almost 1 percent, all but erasing this year's losses.

Regardless of another warning by the UK central bank that it is in no hurry to raise rates which have been at rock bottom since 2008, the jobless figures added to a growth picture that is far brighter than most of mainland Europe.

"In essence what we have is a developing picture of disinflationary growth which is improving the return on sterling," said Peter Kinsella, currency strategist at Commerzbank in London.

"Euro-sterling has broken through some pretty important barriers and I think it (the pound) will continue to outperform this quarter."

While there are more doubts about the UK currency's ability to progress against the dollar, a break above $1.6540 also left this year's highs around $1.66 in question.

"(An attempt on) 1.66 is entirely possible but unlikely to be sustained," Kinsella said.

There was also some help in morning trade for the euro in the form of heavy bids for a Spanish debt sale, helping the single currency recover to trade steady at $1.3554.

AUSSIE HIKE

The Aussie had stolen the spotlight in early trade, rallying against its U.S. counterpart after an unexpected spike in inflation led investors to cut back bets on another interest rate cut.

The Australian and Canadian dollars are seen weakening in 2014 despite an improving global economy, with their prospects likely to be tied more closely to shifts in monetary policy at home than demand for their commodity exports.

But a number of analysts said the inflation numbers hinted that the Australian central bank's next move might be to raise rather than cut rates.

"The market had been pricing in a 30-40 percent change of more cuts in rates and that has really been ruled out," said Michael Sneyd, strategist with BNP Paribas in London. "There may even now be scope for the market to think about the RBA hiking rates."

Most of the action in major currencies this year has come from outside the big three of the dollar, yen and euro in the absence of much new direction on monetary policy by their respective central banks.

The BOJ clung to its upbeat consumer inflation forecasts on Wednesday, encouraged by signs of a broadening recovery that may nudge firms into spending more on wages and investment.

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