by Peter Lavelle
The pound to euro exchange rate has held above 1.28 today, climbing +0.34% to hit a peak of 1.2841.
This is because it now looks almost certain that the European Central Bank will launch emergency monetary stimulus later this month, while in the UK falling inflation may boost economic growth.
Euro declines, as ECB may initiate quantitative easing
Sterling has climbed versus the euro, chiefly because the ECB is forecast to launch drastic monetary stimulus at its next meeting on January 22nd.
This stimulus is intended to both bring the moribund Eurozone economy back to life, and reduce the threat of deflation, whereby prices continually fall.
However, were the ECB to initiate quantitative easing, it would mean injecting trillions of euros into the financial system, thereby devaluing the common currency.
Sterling could climb, as UK to experience "joyflation"
At the same time, the pound may rise against the euro, because the UK's falling rate of inflation may soon boost economic growth.
Prices in the UK are thought to have risen just +0.7% in December, the least since 2002. However, insofar as this puts less pressure on people's wallets, it may in fact benefit the UK economy.
For instance, Scott Livermore at Oxford Economics thinks that the UK will experience "good deflation" in 2015, or what he calls "joyflation."
If this benefits the UK economy, the pound may rise higher.
