The Pound has rallied strongly against the majors over the past week, rising back towards 1.9700 versus the Dollar amid a plethora of positive economic reports and a surprisingly hawkish quarterly inflation report.

Consumer prices have risen to the highest level in seven months while the UK unemployment rate fell to the lowest level since 1975 and that has spurred optimism that growth in the economy will prevail in the face of slowing consumer spending and falling house prices.

The tone of the Bank of England's quarterly inflation report suggested that policy makers are very concerned with the upside risks to price stability and that will limit their scope in cutting interest rates this year.

The statement released by the governor of the BoE, Mervyn King, also indicated that the annualised pace of inflation could potentially breach the 3.0% barrier this year and as a result, the MPC will adopt a wait and see policy with regards the future outlook on UK interest rates.

The Bank of England face the same balancing act as the Federal Reserve did last year in juggling persistent inflationary concerns against slowing growth. However, when economic reports materially worsened and the crisis in credit deepened, the Fed was forced to shift their attention away from inflation and began cutting interest rates aggressively.

The Euro rebounded against the Dollar last night and has also made significant gains versus the Pound as speculation over further U.S interest rate cuts and hawkish commentary from ECB officials helped the single currency breach the 1.3400 level this morning.

The tone of the ECB's monthly bulletin suggests that policy makers are divided on the potential impact to economic growth from the turmoil surrounding financial markets. For the most past, the governing council largely agreed that the economy will continue to expand at a moderate pace and will resist a U.S led economic slowdown that threats a global recession.

The statement followed a stronger-than-expected report on Euro-zone GDP in the fourth quarter as growth slowed from 2.7% to 2.3% in the three months through December.

Amid a steady stream of disappointing data and further signs that the U.S economy is deteriorating, the Federal Reserve may be pressed into further monetary easing despite the unexpected upturn in U.S retail sales.

The overwhelming resilience of the Dollar has been called into question in recent weeks and the rebound in sentiment despite substantial interest rate cuts and worsening economic data can be attributed to hope that the Fed have acted decisively in protecting the future outlook of the economy.

However, the Dollar came under renewed pressure yesterday as the Fed chairman Ban Bernanke addressed Congress and warned about the downside risks to growth despite the recent recovery in consumer sentiment.

As a result, the Fed will lower U.S economic growth forecasts next week while speculation over another interest rate cut in February is likely to weigh on Dollar sentiment.

Data Released 15th February

U.S 13:30 Import / Export Prices (January)

U.S 13:30 Empire State Index (February)

U.S 14:00 TICs Net Capital Inflows (December)

U.S 14:15 Industrial Production (January)

U.S 15:00 Michigan Sentiment (February Prelim)

written by Adam Solomon