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Posted June 19th, 2013 by Charles Purdy

Sterling slips badly as inflation disappoints | Smart Daily Currency Note

GBP/EUR – 1.1685

What was expected to be a quiet day for sterling quickly changed as sterling lost over a cent against the euro and the US dollar mid-morning. The initial catalyst for this was Consumer Price Inflation having increased at a rate of 2.7% in May, higher than expectations and up from 2.4% the previous months. Worries about what today’s Bank of England minutes will contain following this higher than expected inflation also unnerved the markets. And then we had the President of the European Central Bank announce that they were considering non-conventional measures to stimulate the Eurozone which lent support to the euro. Just highlights how nervous the markets still are and we are likely to see further volatility throughout today as the official BoE meeting minutes are released this morning and Bank of England Governor Mervyn King speaks this afternoon. Due to rising petrol, clothing and air travel costs keeping inflation rates stubbornly above the bank’s the 2.0% target, further quantitative easing and interest rate changes remain hot talking points. Speak to your trader now for an update on sterling activity.

The euro has now overtaken the Swedish kroner as the year’s strongest performing major currency. Though this is testament to investor confidence in Europe’s government officials, inflating currency value threatens smaller member nation’s ability to stimulate exports amidst the longest recession in memory. Indeed, recent statistics showed goods sold to outside the euro zone fell 0.8% from the previous quarter. Yesterday morning’s German ZEW sentiment surpassed expectations for the month. The reading emerges despite many markets weakening, and though a consensus of 38.5 is still well below March’s reading of 48.5, the single currency performed well on Tuesday – continuing its ascent against the US dollar and jumping by almost a cent against sterling. The survey certainly suggests Germany’s economy is due to gather pace in the second half of the year, though with the open possibility of negative deposit rates, an accommodative monetary policy and stagnant growth overall, a sustained rise in euro prices may not be healthy for a struggling Eurozone economy. Please telephone in for feedback on the euro.

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