Sterling Strengthens in Currency Trading

The sterling is heading higher in currency trading, receiving a shot of strength from M&A news. The big deal today is that Cadbury has finally agreed to Kraft's buyout offer.

Another boost to the U.K. pound in forex trading came with the latest CPI readings, indicating that inflation is on the rise. GFT's Boris Schlossberg explains in FX360 why the Bank of England is in a tough place now:

Although the hotter inflation data may be partially a function of one-off base effects, it nevertheless creates a serious problem for the BOE which on the one hand is mandated to maintain price levels below 2% and on the other is still in the midst of pursuing its quantitative easing program which is highly dilutive to the currency.

Central banks have a delicate balance to maintain with monetary policy, and it is important for them to do their best to regulate what goes on.

U.S. Dollar Gains in Currency Trading

The U.S. dollar is gaining in currency trading on the FX market this morning, rallying handily on the latest political news.

In forex trading, the greenback has shrugged off mixed economic data and is instead rallying as investors focus on political developments. There are two main focuses today:

-China: Chinese officials are working to curb lending, asking banks to suspend activity for the rest of this month in an effort to tighten monetary policy. This move has FX traders concerned about risk and moving to the the U.S. dollar for its safe haven qualities.
-Massachusetts: Surprisingly, Republican Scott Brown won the battle for the late Edward Kennedy's Senate state. In a state that hasn't sent a GOP Senator to Capitol Hill in around 40 years, this is quite a coup.

This puts the Democrat health care plan in jeopardy and is dollar positive, since it could mean $1 trillion less added to the deficit.

In the end, it's all about politics today on the FX market.