Sterling dropped against most of its traded counterparts on Tuesday as instability in North Africa and the Middle East triggered a wave of risk aversion action across the markets.
The pound has additionally been hit by the rising oil prices, which has seen investors limit their exposure to perceived risk currencies, as well as triggering profit taking of sterling positions which do not offer any upside on the price hikes.
Sterling lost notable ground to the three main safe haven currencies in the form of the US dollar, Swiss franc and Japanese yen at the same time as incurring losses against the euro after hawkish comments arising from European Central Bank policymaker Yves Mersch. Mersch was quoted as saying he would not be surprised if the Central Bank sharpened its stance on inflation which may create renewed hope for interest hikes among investors.
Today the markets focus will be drawn to the Bank of England’s minutes from its latest MPC meeting, with particular attention being paid to committee members’ views on interest rate hikes for the UK.
The euro traded strongly on Tuesday after European Central Bank officials stressed their readiness to tackle inflation through interest rates.
European Central Bank policymakers Yves Mersch and Nout Wellink stated the ECB is ready to fight inflation through increasing interest rates when necessary. This has subsequently prompted interest rate futures to bring forward expectations of a 25 basis point rate hike.
The US dollar rallied against a basket of currencies on Tuesday as safe haven demand among investors increased following on from continuing tension in North Africa and the Middle East.
Tensions in Libya have been making headline news as its current leader Mummar Gaddafi fights an increasingly bloody battle to cling to power. The violence in Libya has also created worries over the supply of oil from the region, which has seen price levels hit 2.5 year highs. Investors have now been looking to exit currencies which have no upside on the rising prices, which has benefited the dollar considerably.
All eyes will be on January’s Existing Home Sales figures, due out at 15:00.