Currency market update 21st April 2006 Sterling rallied a quarter percent against the euro and steadied against the dollar below recent seven-month lows on Friday, with markets focused on the UK inflation outlook.

News that UK consumer prices rose an annual 1.8 percent in March -- below forecasts for a 2 percent increase -- sent the pound lower versus the euro on Thursday.

Earlier in the week, minutes from the Bank of England Monetary Policy Committee's April meeting by contrast showed that members saw upside risks to prices stemming from higher energy costs, even though all but one voted to keep rates at 4.50 percent.

"After the CPI, a lot of the risk that rates will go up has been taken out of the market," said Tony Norfield, head of foreign exchange research at ABN Amro. "We are bearish on sterling."

Yet again prospects of a cut in British rates are particularly negative for sterling when other major central banks are tightening monetary policy or are expected to start doing so soon. I have mentioned this on several times over the phone.

However, some analysts said that British inflation could yet pick up in the coming months as oil prices continue to set record highs.

Signs of a pick-up in the housing market could also discourage the BoE from cutting rates.

British retailer John Lewis Partnership said on Friday weekly department store sales were up 13.5 percent in the latest week.

Currency markets are focused on the G7 meeting in Washington on Friday. U.S. Treasury Secretary John Snow holds the G7 news conference at 2330 GMT, following the meeting.

Interbank Rates
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