Sterling rises on Inflation Data
The pound climbed to its highest level in 7/8 months yesterday after much better than expected inflation data.
The Consumer Price indec fell to 2.2% last month which is bigger than analysts’ forecasts for a fall to 2.0%. The news encouraged the belief that the defaltion risk for the UK economy is now very low indeed. It also followed a raft of UK data which has boosted belief that the economy is on the road to recovery.
So, this is what has caused contined gains for the pound, however this morning some of those gains have been paired back. News that US industrial production fell more than expected in May dampened optimism that the global economy is over the worst. Also, profit taking by traders has caused a slight fall this morning, probably also due to anticipation of the UK unemployment figures today (see below).
So far this month the pound has gained 3% over the Euro, leaving it on course for a quarterly gain of more than 8 percent -this would be the biggest quarterly gain against the single currency since its inception 10 years ago.
Although analysts are wary of drawing too many conclusions on the basis of one month’s data, the inflation figures mean that the Bank of England may not need to implement any additional quantitative easing (QE). It is this QE that has been causing the pound to fall earlier in the year, and it was thought that further funds would have to be made available. Now however this seem unlikely.
It’s now more likely we could see Interest rate increases for the UK later this year – this will boost the value of Sterling, so another reason for the gains is speculation that this will happen. When a country or zone increases interest rates, the yeild investors get for the currency is increased – this causes more buying of the currency thus increasing its value.
We have UK unemployment data – any increase in the claimant count will likely weaken the pound, althougth this is unlikely. Also watch for the Bank of England minutes for the most recent interest rate decision. This will show how they voted, and can also cause volatility in the pound.
After yesterdays UK inflation data, today we have inflation data for the US at 13:30pm. It is a measure of price movements by the comparison between the retail prices of a representative shopping basket of goods and services. The purchase power of USD is dragged down by inflation, so if you are buying or selling US Dollars, watch this closely.
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