Increased chance of QE pushes Sterling lower

Wednesday 18th January 2012
Good morning. Yesterday UK inflation figures increased the chance of further Quantitative Easing next month, pushing Sterling lower against other currencies. The Euro also strengthened a little earlier in the day after better than expected German data, however ongoing concern about sovereign debt limited the drop, with rates for Euros ending up where they started the day! Today we have various unemployment measure for the UK, which will likely have the biggest impact on rates. Below shows how GBP/EUR and GBP/USD moved yesterday:

~Currency Movements on Tuesday 17th January~

UK Inflation data increases chance of Quantitative Easing

Data released yesterday showed that UK inflation fell sharply in December, with the annual CPI rate dropping to 4.2 percent from 4.8 percent in November, supporting the Bank of England’s view that consumer price inflation may have peaked. This lower than expected reading is likely to increase the chances that the Bank of England will embark on another round of Quantitative Easing next month.

Clear evidence of falling prices is a precondition for some BoE policymakers to back QE expansion, and so the numbers have caused the Pound to fall. Further data this week such as today’s unemployment figures could add to the case, which may bring Pound/Euro prices down from the current highs.

So if UK data continues to disappoint, will GBP/EUR rates fall?

Investors are also mindful of UK economic weakness, with recent data pointing to a high risk of recession. There are lots of other key data releases coming in the next few weeks, and if they are poor it could weigh more heavily on sterling, which late last year was largely immune to UK worries as investors sought alternatives to euro zone assets.

Now however, with the EU debt crisis ongoing, focus is starting to return to core UK economic performance, which is poor at best and this could bring rates back down.

What about the US Dollar?

Rates to buy Dollars are currently at an 18 month low, as the US currency is very strong at the moment. This is nothing to do with any positive US economic data – it’s simply the case that the USD is a safe haven currency, and with all the well publicised problems in Europe, it’s an attractive option at the moment. Simple supply and demand dictates with the world wanting the safety of the dollar, it’s becoming more and more expensive to purchase.

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Today’s Data

Today’s most important release will be unemployment numbers for the UK which will show the number of people out of work and claiming benefits. In Europe, there are some figures showing construction output. In the states we’ll see Inflation data, Industrial production, and the Housing Market index.

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