by Brian Miller
Sterling has fallen –0.75% versus the euro today to as low as 1.3435, and is now more than a cent below its recent 7-year high. The pound has lost out, chiefly because UK inflation hits its lowest since records began in 1989 last month, while German investors have grown unexpectedly upbeat about the current financial outlook.
The pound has declined today, because UK inflation fell to just 0.3% in January, according to the Office for National Statistics, –0.2% lower than the month before, and the lowest since records began in 1989. This weakened sterling, because with inflation low, it greatly cuts the odds that the Bank of England will hike UK interest rates in the foreseeable future.
Moreover, looking forward, sterling may continue to lose out, because UK inflation is expected to drop further in coming months. For instance, Capital Economics analyst Paul Hollingsworth said today that “We think that a brief period of deflation is imminent,” as UK energy companies factor in the recent dip in oil prices, as well as falling food costs.
Meanwhile, sterling also finds itself on the back foot versus the common currency today, because German investors grew unexpectedly upbeat about the current financial outlook this month, according to economics body ZEW. ZEW’s current situation figure hit 45.5 this month, well ahead of the 30.0 forecast, indicating that German investors think the immediate future is bright. This is the fourth consecutive month that the ZEW index has risen, and so could weigh on sterling versus the euro.
