UK inflation falls as talk of further QE increases

Tom Tong20/Jun/2012Currency Updates

GBP

UK inflation rates caused some movement for sterling yesterday after a sharp fall to 2.8 percent on the year from 3.0 percent in April, reigniting talk of more QE by the Bank of England. This sharp drop to 2.8 percent, a rate we have not seen since November 2009, was well below forecasts of an unchanged rate. Although the cost of living is still rising faster than wages, leaving household budgets tight, the gap is finally closing.

The better news on inflation comes after the Sir Mervyn King hinted in his mansion speech last week that further QE could sit alongside measures to support bank lending. The minutes from the Bank of England’s latest policy meeting, released today, are expected to see support for further QE.

EUR

A strong day yesterday for the single currency rebounding from Monday’s trading against its 2 major rivals and also against a number of Asian currencies. The support came on the back of optimism that Greece will renegotiate its bailout package with its international lenders and make steps towards forming a coalition government after Sunday’s elections.

The eurozone’s fourth largest economy took another blow yesterday as Madrid was forced to delay an in-depth review of its crippled banks until September. Spanish treasury sold 12 and 18 month debt at yields of 5.07 percent on average, compared with 2.99 percent a month ago. This causes more concern that Spain may well have to seek a fully blown bailout package. The good news for Spain is that, should they need more help, the IMF has beefed up their crisis-fighting fund to £291 billion at the G20 summit in Mexico.

USD

The dollar lost considerable ground against a number of its main counterparts yesterday ahead of the Fed’s meeting today where they will announce its policy decision with many believing it could opt for a third round of QE as the troubles in Europe pose a risk to growth in the worlds largest economy. Another round of monetary stimulus would weigh on the dollar and boost growth linked currencies like the Australian dollar.

The dollar index, which measures the dollar against a basket of major currencies, was down 0.7 percent at 81.345, having hit a one month low of 81.266 on Monday.

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Written by Tom Tong

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