Jump in UK Inflation Helps Sterling to Euro Exchange Rate Climb

Published: Wednesday, 18 April 2012 09:00 BST - Written by John Cameron

STORY LINK Jump in UK Inflation Helps Sterling to Euro Exchange Rate Climb

The future direction of UK monetary policy grabbed the headlines in the currency markets during yesterday’s trading session, as the latest British inflation figures showed a surprise hike in the rate of domestic price rises. March’s headline CPI inflation number showed at an annualised 3.5%, up from February’s counterpart number of 3.4%. Analysts had been expecting the figure to remain at 3.4%, so the release provided some upside for the Pound on the day.

The British government’s self-imposed inflation target remains at 2.0%, so the fact that the current rate of price rises is 75% above this level provides considerable food for thought for the Bank of England’s policy-makers. We will learn more about their thinking later this morning, with the release of the minutes of the most recent BoE Monetary Policy Committee meeting. In practice, with persistent British price rises still being blamed on exogenous factors, primarily the rising cost of imported foodstuffs and raw materials, it seems unlikely that the minutes will reveal that the nine-man committee openly considered a rise in UK interest rates. However, the fact that domestic inflation is edging higher may colour the committees thinking on the potential for an extension to the Bank’s existing £325bn QE programme. Any comments from the MPC suggesting that its Asset Purchase Programme may be kept to £325bn would be likely to trigger support for Sterling in the near-term.

Elsewhere, yesterday’s Spanish bond auction saw a good uptake for the fiscally-challenged Iberian state’s government debt. This, in turn, caused the yield on Spanish bonds to drop back below 6% - a level which had been breached in the early part of this week’s session. If today brings a further move lower for Spanish yields, then the euro is likely to push on, giving the potential for the GBP EUR exchange rate to re-trace back down towards the psychologically significant 1.2000 level.

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