CPI figures send sterling tumbling against euro and dollar

Tom Tong13/Apr/2011Currency Updates

GBP

Sterling fell sharply on Tuesday morning against the euro and dollar after CPI figures showed a surprise drop in inflation, dampening speculation of a near term interest rate hike from the Bank of England. Inflation has fallen in March from 4.4% – 4% – the first time we have seen a decline since summer 2010 as food prices dropped by a record 1.4% from February to March.

Sterling was dealt another major blow on Tuesday as the Retail Price Index showed its biggest drop in six years. The figures confirm the uphill task facing the UK economy as the government’s tough austerity measures impact heavily on consumer spending. The unexpected drop in annual inflation coupled with the dramatic decline in retail sales figures is providing the MPC with further ammunition to hold back on interest rate hikes until the economy is on a solid footing.

The market’s attention will now focus on this morning’s unemployment figures from the UK, released at 09:30 GMT. An unexpectedly high reading for unemployment claims could strengthen the case for higher interest rates prior to August.

EUR

The euro strengthened against the pound, getting close to 12 month highs during Tuesday trading as differing interest rate outlooks In the UK and Eurozone supported the currency. With inflation retracting in the UK and interest rate hikes being pushed back from the BoE it bodes well for the euro, as many suggest there may be further rate hikes to come from the ECB.

USD

On a light day of economic data out of the US on Tuesday the major news came in the form of the US trade balance, which showed the trade deficit shrank in February as imports fell more than exports, according to a government report on Tuesday that suggested a slowdown in global demand.

The monthly trade gap totalled $45.8 billion, down from an upwardly revised estimate of $47.0 billion in January despite another monthly rise in prices for imported oil.

Today’s focus will be on the upcoming Advance Retail Sales report, which represents a potentially interesting bit of event risk for the US currency. Analysts predict that US consumer retail spending grew by a respectable 0.5 percent when excluding volatile automobile sales and gasoline purchases. The USD’s strongly negative correlation to the S&P 500 suggests that the currency could actually pull back on an above-forecast result and subsequent rally in ‘risk’.

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Written by Tom Tong

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