Inflation Report Damages Sterling

14 February, 2013

Simon Eastman

The pound having fared okay so far this week, took a turn yesterday morning as Mervyn King, the Bank of England governor, gave his quarterly inflation report. He proceeded to say, that Britain’s recovery will be slow. He stated it will take a longer than initially thought to reduce the high inflation, which yesterday stayed at 2.7% for the third month in a row, but forecast to rise to 3% this year. Probably most damaging to the pound was his comment that, on its own, the Bank of England can do little to improve matters. “This hasn’t been a normal recession, and it won’t be a normal recovery,” King commented.

The report was more doom and gloom for the pound as investors dumped it like supermarkets have beef products. A drop over the day against the commodity dollars, the USD, CAD, NZD and AUD by around 1 percent and a touch more of 1.25 percent against the Euro, Norwegian, Swedish, Czech and Danish Krone. It wasn’t as low as we have seen recently for those buying the single currency but close to it and proof that in this volatile trading any spike up, like we saw towards the end of last week, is well worth taking advantage of, rather than waiting in vain hope levels will go back up to 2012 levels.

Inflation is expected to stay high until 2016 according to King, helped by increases in utility costs and other Government lead hikes along with a weaker pound. A weak pound is bad for inflation but good for exports which help to stimulate growth so it’s a tough balancing act and is likely to remain so over coming years long after King gives way to Mark Carney in June. Carney has already stated that he intends to play things by ear, leaving his options open as to the policy he will impose but we will have to wait and see if a fresh approach can help.

Back to the here and now and we have European GDP this morning, US jobless claims this afternoon followed by a couple of FED member speeches. So with nothing for the UK, it could well be another painful day for the sterling. If you have an upcoming currency purchase to make, do get in touch with us here at Currency Index today to discuss the various tools available to limit your risk in these volatile markets.