Sterling slips due to high inflation figures

Published: 20 January, 2011

Sterling slipped yesterday against the euro and US dollar dropping from the highs seen on Tuesday, after UK inflation came in much higher than expected.

Currency rates

EURO/GBP - 1.1867

US$/GBP - 1.5952
CHF/GBP - 1.5237
CAN$/GBP - 1.5915
AUS$/GBP - 1.6045
ZAR/GBP - 11.1843
JPY/GBP - 131.077
HKD/GBP - 12.4146
NZD/GBP - 2.0869
SEK/GBP - 10.5961
US$/EURO - 1.3439

Jobless claims dropped by 4,100 in December against an expected rise of 1,500 but analysts were very weary of a poor labour market in the next few months as public sector job cuts are set to take effect. Despite dropping below $1.60/£1, sterling remained up 0.1% on the day against the US dollar but fell 0.6% against the euro as the single currency got a boost from expectations that European officials will be able to navigate through the debt crisis and find a more long term solution. Sterling is likely to remain well supported against the major currencies after much higher than expected inflation figures on Tuesday.

In the euro zone, the euro had a strong day yesterday and hit a two-month high against the US dollar overnight on expectations that policymakers in the region would put a more long term plan in place to solve the debt crisis. In addition, rumours that banks in Asia would look to hold euros also helped boost the euro. There has been a spate of 'short covering' where investors who were hoping to profit from a falling euro have bought back the currency - again, boosting the strength. Today, there is European consumer confidence data and we have already seen German PPI data come in better than expected.

In the USA, the US dollar held relatively steady following Tuesday's broad fall against other currencies. However, disappointing earnings figures from Investment Bank Goldman Sachs and poor housing data did not help the US currency. Global risk appetite was given a boost as sentiment over a long term European solution improved - this saw the US dollar hit a 2-week low against the Swiss franc. Out today, there is home sales and manufacturing figures.

Elsewhere, China's GDP grew from 9.3% to 9.8% on the quarter and inflation came in slightly lower than expected. The lower inflation was good for the Australian dollar, as it means that China is unlikely to look at tightening monetary policy yet and as such export demand from Australia should remain high.

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