by Jane Fisher
UK sterling has fallen -0.86% versus the euro today to its weakest in 10 days, or since January 23rd, at 1.3216.
The pound has declined, both because UK factories cut their prices at the fastest pace since 2009 last month, raising the chances of deflation in Britain, and because investors are betting that Greece will ultimately stay in the Eurozone.
Pound weakens, as UK factories drive deflation
Sterling has lost out versus the euro today, first because UK factories cut their prices -0.9% in January, the fastest pace since September 2009, according to official figures from the Office for National Statistics today.
This weakened the pound, because it's likely to further drive down the rate of inflation in the UK, which in December hit a multi-year low of just 0.5%. In turn, this puts less pressure on the Bank of England to hike interest rates above their current record low of just 0.5%, which will thus limit the profitability of investing in the UK, and so cut demand for the pound. Hence, sterling's weakness today.
Moreover, the pound also fell today, because in January the UK's factory sector failed to grow at a pace that will meaningfully add to economic growth. UK factory expansion hit 53.0 last month according to Markit, above the 50.0 that divides expansion from contraction, yet too slow to drive the British economy. Markit economist Rob Dobson for instance notes that "At this rate, the sector will provide little meaningful boost to the economy in the first quarter."
Euro rises, as Greek government assures will stay in euro
What's more, the euro has strengthened today, because Greece's new government has sought to assure investors and the international community that it intends to stay in the Eurozone. This weekend, Greek prime minister Alexis Tsipras told journalists that "I am absolutely confident that we will soon manage to reach a mutually beneficial agreement, both for Greece and for Europe as a whole."
This strengthened the euro, because it assures investors that Greece's priority is to remain in the common currency bloc, and that fears of an accidental "Grexit" are overblown.
