Sterling’s Inflation Roller-coaster

Following yesterday’s surge to some of the strongest levels seen in five months, Sterling has today shown an initial drop of 0.7 percent on the Euro since 10.30am as the Bank of England Governor’s quarterly inflation report and speech dampened yesterday’s high expectations for an earlier interest rate rise. Anticipation from yesterday that an interest rate rise might come as soon as May following the high 4% inflation figure seems to be waning as the press conference continues this morning with Mervyn King adopting his usual downbeat tone and not endorsing these market predictions.

Pound Sterling – UK Markets

Sterling reached the strongest level in five months yesterday following the 4% CPI inflation figure for January but has begun sliding again so far this morning. Yesterday’s figure, twice above the Bank of England’s 2% target, had sent expectations spiraling higher that an interest rate rise will occur earlier than expected in the UK. The Bank of England Governor this morning however has subsequently dampened expectations with a downbeat inflation report and speech contradicting these presumptions. Markets had interpreted information provided yesterday in the Bank of England Governor’s obligatory letter to the Chancellor (explaining why inflation is so far above target) to suggest that there will in most likelihood be three rate rises this year beginning in May. This morning however the Governor suggested that raising interest rates is not the best way to deal with inflation and will not necessarily prevent the rising figure as the problem stems from areas such as rising commodity prices and tax changes. This has sent Sterling stopping in its tracks and the currency has moved lower alongside some poor unemployment reports.

US Dollar – US Markets

The Dollar showed gains against the Euro throughout the second half of yesterday but has been dropping off so far this morning and has experienced losses against the Pound in the last twenty four hours. Data yesterday afternoon was weaker than expected with retail sales for example only up by 0.3 percent following 0.5 percent the previous month. Safe haven flows offered some support however as tensions in the Middle East and ongoing issues in Europe made the Dollar attractive to those risk-averse investors. Today sees data released this afternoon in the areas such as housing starts, mortgage applications and industrial production.

Euro – European Markets

The Euro had a volatile day as GDP figures were revealed as showing a 0.3 percent level of growth in the last quarter. The currency lost out to the Pound as the UK experienced strong inflation figures but rose on the US Dollar. With no data out of Europe today, the currency will be responding to broader market themes as effects of the UK inflation report take place and with the US data releases this afternoon.

Other Currencies – Highlights

The Canadian Dollar came close to a two year high as the crude oil prices, the nation’s biggest export, showed volatility. This comes shortly after the nation’s first positive trade balance in ten months was announced for December although markets are suggesting that another surge in oil prices is required to send the currency even higher. For a live quote or to tell us about your foreign exchange requirements, please call us on +44 (0)20 7740 0000.