Data fails to inspire sterling

Monday 20th February 2012

Although a slew of important UK economic developments generally had a limited impact, sterling edged higher against most of its major rivals last week, financial experts Hargreaves Lansdown report. 

The pound shrugged off news the UK’s consumer price inflation rate fell to 3.6% in January, continuing its decline from a peak of 5.2% in September. The drop was largely in line with expectations and reflects the disappearance of a VAT rise in January 2011 from the annual comparison of prices. The Bank of England’s (BoE) latest inflation report suggested inflation should fall below its 2% target from the second half of this year, prompting some speculation the Bank could extend quantitative easing (QE) measures again if the economy remains weak. 

BoE Governor Mervyn King described the aim of its policies as ‘trying to persuade people to bring forward spending from the future to the present’. A stronger-than-expected rise in UK retail sales in January, building on December’s sales improvement, will have given him some encouragement. However, the Bank will be wary the unemployment rate remained at 8.4% at the end of 2011, its highest level for 16 years. Moody’s, a credit rating agency, cautioned weak growth prospects pose a risk to the UK’s coveted AAA debt rating.

The US central bank appeared to leave the possibility of further QE open, with the latest policy meeting minutes showing some policymakers anticipated more asset purchases being required before long. Consumer price inflation continued to moderate, potentially giving the Federal Reserve scope to adopt further stimulus measures if needed. Wider global optimism levels and the evolving eurozone crisis remained important influences for the US dollar, which lost some ground versus sterling late in the week as sentiment improved.

Sentiment towards the euro had initially deteriorated after a cancelled meeting between eurozone finance ministers put in doubt a €130bn (£110bn) second bailout for Greece. However, subsequent comments from several European leaders suggested a rescue package could soon be agreed. The euro zone’s Gross Domestic Product (GDP) fell 0.3% in the final quarter of 2011 according to the first estimate, with three of the four biggest economies (Germany, Italy and Spain) all shrinking.

The Japanese yen, a currency which is often perceived as a safe-haven, was one of the worst performing amongst the major currencies. The Bank of Japan increased its asset purchase programme by ¥10 trillion to ¥65 trillion to try to curb the yen’s strength and spur economic growth. Japan’s GDP fell by 0.6% in the final quarter of 2011, led by a sharp drop in exports. The yen’s fall accelerated towards the end of the week as global investor optimism improved.

Despite generally buoyant global stock markets and commodity prices, the pound generally avoided significant losses against the commodity-led currencies such as the Canadian, Australian and New Zealand dollars. Domestic announcements tended to exceed market expectations. Canadian consumer price inflation rose to 2.5% in January, led by rises in food and energy costs. Australia’s economy added 46,300 jobs in January, the largest monthly increase in over a year. New Zealand retail sales rose strongly in the final quarter of 2011, helped in part by visitors for the September/October Rugby World Cup.

Sterling initially fell to its lowest level against the Swedish krona since October 2011, although the pound’s losses were later reversed after Sweden’s central bank cut interest rates by 0.25% to 1.5%. It confirmed it expects interest rates to remain at this level until 2013, given low inflationary pressures in the economy currently and a weaker economic outlook as a result of developments abroad.