Foreign Exchange Rates : GBP EUR Rate Drops Despite Sterling-Positive Inflation Data

18 May 2011 at 7 AM - Written by John Cameron

STORY LINK Foreign Exchange Rates : GBP EUR Rate Drops Despite Sterling-Positive Inflation Data

The Pound Euro exchange rate (GBP EUR) is 1.1406. The Pound Dollar exchange rate (GBP USD) is 1.6271.

Yesterday’s major data release came in the form of the CPI Inflation figure for April in the UK.

Analysts had expected the number to show that UK inflation had increased slightly from last month’s 4.0% reading to 4.1%. However, the figure far outstripped expectations when it printed at 4.5%.

The market’s reaction to the figure, which showed that UK prices are rising at more than twice as rapidly as the government’s target of 2.0%, surprised many analysts.

Although the Pound traded higher against the other majors in the immediate aftermath of the release, this reaction proved to be a whipsaw and it rapidly dropped back to below where it had been trading at the time of the release. The GBP EUR exchange rate had stood at 1.1484 at the time of the release, but within two hours had traded back down to 1.1442.

The reason for the market’s muted response to the apparently positive figure was attributed to several factors. Many analysts have suggested that the figure was not a surprise at all and that it had been leaked ahead of its release. This would explain why the Pound made steady gains in the two hours leading up to the release.

The commentary from the Office of National Statistics, which accompanied the figure, may also have dampened any potential Sterling upside. The ONS stated that last month saw a one-off upward move in prices caused by the Royal Wedding, unseasonably warm weather and more expensive travel costs due to the Easter holidays. This commentary suggests that next month’s CPI figure may show a decrease back towards 4.0%, or perhaps lower.

The minutes of May’s Bank of England Monetary Policy Committee meeting are released at 0930hrs BST today and these will give further indication of the likely direction of UK interest rates. Long-time hawk, Andrew Sentance, is certain to have voted for a hike of at least 50 basis points in his last meeting. Members Weale and Dale will also have voted for a raise, but if these are the only other members to have done so, then there is the possibility of further Sterling downside, with Friday’s low of 1.1364 the near-term target for GBP EUR.

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