UK inflation falls but exchange rates improve

Yesterday’s UK inflation figures showed that prices in the UK economy rose by just 0.5% in the year to December – the joint lowest on record.

Normally low inflation sends sterling lower, because it makes interest rate rises less likely; making exchange rates worse for sending money abroad. But the Pound in fact improved against the Euro back to near multi-year highs, held firm against the US Dollar, and was also up against the New Zealand and Australian Dollars and South African Rand.

The reason perhaps is that although Bank of England Governor Mark Carney confirmed that the news could mean lower interest rates for longer, he said he still expected interest rates to “move up over the course of the next couple of years”. This is in stark contrast to the Eurozone, where economic and political problems may cause the European Central Bank to print money later this month, the prospect of which has been keeping the Euro cheap.

The slowing of inflation was also compared to a “giant tax cut for the economy” by Danny Alexander.

Falling UK inflation was also put down to lower petrol prices; and if January’s figure falls below 0%, which many analysts are predicting, we would be likely to see the Pound lose value. For now however, particularly against the Euro, we have excellent exchange rates with the prospects of the Greek election and ECB policy meeting at the end of the month keeping the single currency particularly cheap as markets ‘price in’ bad news to come.

Focus on the US Dollar today

Today the only main figures due out are US retail sales (1.30pm), where any increase in December’s high street figures in the States could send the USD more expensive again. With US interest rate rises on the horizon, the US Dollar has become 8% more expensive in the last 12 months against the Pound. Overnight tonight we also have Australian unemployment figures which could move exchange rates for those of you looking to move funds down under.