Sterling sated sell interest at 1.9490 and 1.9500 en route to a London morning of 1.9505, as the pound continued to elicit benefit from yesterday's 25bp UK base rate rise to 5.25%. That unexpected hike, and the BoE's accompany statement of explanation, has raised fears of a topside shock re: next Tuesday's UK December inflation figures (Jan 16).
If annualized UK CPI comes in above 3.0%, BoE Governor Mervyn King is duty bound to write a letter of explanation to Chancellor Gordon Brown. CPI rose to 2.7% in November. 2.0% is the BoE's target level. Further GBP/USD offers are touted at 1.9520 and 1.9540. Eight-day highs just shy of 1.9540 were notched yesterday, on the back of the UK rate hike.
1.9393 was the pullback low from those pre-1.9540 highs. Good size selling from a US investment house helped depress EUR/GBP to a new 19-month low of 0.6618 during the London morning. Today's key US event risk is the 13:30GMT disclosure of December retail sales. Forecast: +0.7% m/m, ex-autos +0.5% m/m.
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