Tuesday 22/5/12: UK Inflation Rates Fall and IMF Warns UK to Cut Interest Rates

Pound to Euro Exchange Rate with UK Election Heating Up

UK inflation figures were released this morning and showed a sharp fall from 3.5% to 3%, the lowest levels since February 2010. Retails figures also fell and this may well lead investors to question whether the BoE will now reconsider another round of Quantitative Easing over the coming months. If this is even mentioned as a possibility it could well halt GBP’s chances of further gains against the EUR and in the current climate, rumours are moving the markets just as much as fact.

At time of writing GBP/EUR rates were sitting at 1.2370, down 2 cents from the highs we were experiencing in the middle of last week. As I highlighted in previous blogs I feel Sterling has been overvalued against the euro and the strength we saw was due to the on-going fiscal problems in Europe and investors lack of confidence in the euro, rather than any real belief in our own currency. This means there was always an opportunity for levels to snap back as soon some news came out to dampen expectations on the UK economy, or some positive noises were made in Europe. In fact it was Mervyn King who last week announced that growth forecasts in the UK have been cut for 2012 and that signalled the start of the euro fight back.

We had seen GBP levels move beyond a three and a half year high against the single currency and it looked as if this strength was going to push levels back up toward 1.30 over the coming months, if not weeks. Whilst it’s impossible to say with certainty that they won’t reach that level, I feel expectations regarding the UK economy have now been sufficiently stifled and levels could well settle between 1.22-1.24 as the markets wait for further news on Greece and the short-term growth prospects in the UK and Europe.

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