Low inflation puts more pressure on the pound

15 October, 2014

Rob Bastin

After a negative start to the week the pound was in focus again yesterday with the release of the latest inflation figures for the UK. With sterling already dropping in recent weeks, the markets are currently very vulnerable to poor data and this was very much during Tuesday’s trading. The headline Consumer Price Index figure was forecast to drop slightly to 1.4% from 1.5% last month but actual figures saw a drop to 1.2%, some 0.8% short of the Bank of England’s 2% target and its lowest rate for 5 years. What does this mean for interest rates and the pound? To put it simply these figures will almost certainly delay any interest rate hike in the UK as low inflation is actually combated by a rate cut rather than a hike. Deflation is far from a concern at present so rate cuts are very much out of question currently but a delay in any future hike will mean a potentially prolonged period of sterling weakness going into the new year.

Both GBP/EUR and GBP/USD have dropped around 3 cents so far this month and in light of the recent figures it is expected that rates will continue to get worse before getting better. Do you have a property completion before the end of the year? If so make sure you get in touch with your account manager to discuss a Forward Contract that can protect you from any further adverse market movements.

Today is chance for the pound to try and bounce back from yesterday’s losses as the latest unemployment rate is to be announced at 9:30am. A positive drop from 6.2% to 6.1% is forecast but any shortfall on this could see further trouble for sterling. As with last month it will likely be the strength of the average earnings figures that have more of an impact on the markets today. This afternoon at 1:30pm latest US Retail Sales are released with poor figures expected compared to last month.