Sterling has dropped against the Euro after the latest inflation figures were released by the office of national statistics.
The report shows that the consumer price index inflation figures for May showed a shock contraction in the rate of price rises in the UK. It is the first monthly drop in over ten years and paves the way for the Bank of England’s policy committee to implement further quantitative easing. All eyes will be on tomorrow’s meeting of the BoE’s decision makers and whatever they decide will affect the pounds exchange rate further.
The figure fell from 3% in April to 2.8% in May, the retail prices index (RPI) fell from 3.5% in April to 3.1% in May.
“Expect further falls in inflation as energy bills rise less over the summer versus last year,” said George Buckley at Deutsche Bank. “The fall in CPI inflation to 2.8% in May increases the likelihood at the margin of more quantitative easing (QE)… We expect £50bn with a sizable risk of a 25 basis point rate cut to boot.”
A Treasury spokesman said: “Inflation is out of Open Letter territory for the second month in a row, which is good news and is providing some welcome relief for family budgets.”
Whilst the news is good for the purse strings it isn’t so good for the strength of the pound. The rumours that the bank is sure to implement further monetary measures have seen the currency weaken against a basket of currencies. The pro euro result from the Greek elections saw a very brief boost for the single currency but investors quickly realised that the result hadn’t really changed anything. Negotiations are still ongoing between the victorious new democracy party and other political parties about forming a coalition government. The woes from Spain are also limiting the Euro’s gains against sterling.
The Euro has also strengthened against the Dollar after European Union officials declared that Greeks will be rewarded for choosing the bailout victors of the election raising hopes that Greece’s bailout terms will be renegotiated and therefore eases the battered nation’s woes.
The greenback fell against most of its peers as investors wait to hear the results from the upcoming two day meeting of the Federal Reserve. Most are expecting them to implement further monetary measures to help boost the economic recovery.
Concerns continue to mount over Spain after the government delayed the results of its banking audit prompting concerns that the already announced bailout of €100billion is not enough. The big question now however, is just how much extra will the Spanish banks really need to stave off disaster.
The Pound to Euro exchange rate is currently trading at 1.239
The Pound to US Dollar exchange rate is currently trading at 1.571
The Euro to Australian Dollar exchange rate is currently trading at 1.244
The Euro to US Dollar exchange rate is currently trading at 1.267
The Euro to Pound exchange rate is currently trading at 0.806