Inflation puts more pressure on Sterling

20 August, 2014

Rob Bastin

Sterling lost further ground against its major pairs yesterday after the latest Consumer and Producer Price index figures for the UK raised more concerns over the Bank of England’s ability to raise interest rates any time soon with inflation dropping further away from the 2% target. CPI posted a figure of just 1.6%, down from 1.9% last month and short of the 1.8% expert predictions. Lower inflation is typically combated with a cut in interest rates, and whilst deflation is not a real concern at the moment, a lower level of inflation makes it very difficult for the Bank of England to start raising interest rates and so it seems more and more likely that this will not happen until early 2015.

With the pound in a negative correction at current, any bad news such as this is having a damaging effect on buying levels. Markets expect more selling in the coming weeks and so anyone holding out for a quick turnaround may wish to strongly consider securing your rate on a forward contract to guarantee your future rate at current levels, therefore protecting yourself from any further losses.

The US Dollar has continued its resurgence against the weakening pound and was boosted further yesterday afternoon with on par inflations levels of 2%, very much as forecast. The US Dollar comes into focus again this evening at 7:00pm with this month FOMC minutes. This morning however it is the Bank of England who release their latest minutes and we will see whether any of the 9 members decided to vote for a rate hike at the decision to hold announced 2 weeks ago. Whilst we would still be a long way off a majority vote, the pound could find some small relief if any members were seen to vote positively towards a rate hike.