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As we highlighted in our ‘Sterling Update’ yesterday there was a good bit of GBP news yesterday which pushed GBPUSD and GBPEUR up to its recent highs.

The newly-formed Office of Budget Responsibility (OBR) released their preliminary assessment of the UK economy and while the figures are still poor, there were some silver linings to the budgetary clouds. The outlook for growth has worsened with GDP cut from predictions of 3.25% in 2011 and 3.5% in the following three to 2.6% and 2.7% respectively however the good news came in the form of lower government borrowing requirements (£155bn vs £163bn expected in 2010)

Of course, the main event is next week’s Budget but this has set up sterling well for the announcement. It has a fair bit of data to negotiate beforehand however and therefore downside risks are all to evident.

Sterling was also helped higher by hawkish comments from MPC member Andrew Sentance. He commented that the UK economy would be ready for interest rate rises by the end of the year and speculators bought GBP on the back of this. We disagree with this assessment and believe that the case for letting the recovery grow more before enacting monetary policy changes is needed.

While the UK basked in this good news, the Greeks were once again annoyed, vuvuzela-style, by a ratings agency downgrading its sovereign debt rating. Moody’s dropped Greece’s level by 4 levels to ‘junk’ status. The euro weakened on this towards the end of the trading session hitting intraday lows of 1.22 on EURUSD. This has since continued to weaken to the levels seen below.

Data-wise we are spoilt for choice with UK CPI and RPI due at 09.30, EU Trade Balance and German ZEW at 10.00 and the dollar-centric info comes in the form of NY Empire State Manufacturing at 13.30 and Net Long Term TIC Flows at 14.00. CPI and RPI should slacken this morning although it will stay close to these very high levels seen of late. We would expect sterling to follow as investors look to fade it form the highs it is currently experiencing against the EUR and more probably the USD.