by Jane Fisher
Sterling has jumped +0.34% versus the euro to hit a peak of 1.2794 today, just a cent below its highest in almost 7 years, or since March 7th 2008.
The pound has gained, because inflation in the Eurozone turned negative in December, for the first time since September 2009, in the aftermath of the financial crisis.
Sterling strengthens, as Eurozone deflation risk grows
Sterling has lifted versus the common currency today, because Eurozone inflation fell to -0.2% last month, below the -0.1% consensus forecast.
This boosted the pound, because it increases the risk that the common currency bloc will experience deflation, a period of continually falling prices.
Were deflation to occur, it may be negative for the Eurozone, because it's closely associated with economic stagnation, akin to what Japan experienced in the 1990s.
Pound may rise, as ECB prepares emergency stimulus
Moreover, sterling may continue to rise versus the euro, as the European Central Bank is widely tipped to announce emergency stimulus, called quantitative easing, to fight the risk of deflation.
Earlier this week for instance, ECB chief Mario Draghi told German newsletter Handelsblatt that the risk of deflation in the Eurozone "cannot be entirely excluded."
Quantitative easing would ease the risk of deflation, because it means injecting enormous sums into the Eurozone's economy, thereby devaluing the euro, and lifting prices.
However, a side effect of this is that, as more euros come into circulation, currencies like the pound rise versus the euro.
