The pound initially fell against the euro yesterday morning on the publication of the latest UK inflation data from the Office for National Statistics (ONS). The ONS reported that the UK inflation rate fell in June to its lowest level since November 2009 although it still remains above the Bank of England’s (BoE) target level of 2%.
Data showed that the annual rise in the Consumer Prices Index (CPI), the government’s favoured measure of inflation eased from 2.8% in May to 2.4% in June. As recently as September 2011, the CPI rate of inflation was running at 5.2%.
The Retail Prices Index also came in lower than expected, easing from 3.1% recorded in May to a figure of 2.8% in June.
The pound quickly recovered as the ZEW Institute in Germany published its economic sentiment index which showed a fall for the third month in a row in German economic sentiment. The index now stands at a 6 month low and clearly shows that even the euro zone’s economic powerhouse is not immune from the sovereign debt crisis afflicting the area.
More predictably, for the euro zone, the ZEW economic sentiment index also fell at a faster rate than analysts were expecting.
ZEW president Wolfgang Franz commented that “The decline of the economic expectations concerning the end of 2012 is flattening out gently. This could possibly be an early sign of an encouraging development in 2013. However, risks should not be underestimated. Besides the weak demand from the euro zone for German exports, the German economy is also burdened by weakening growth dynamics in other important partner countries”.
The US dollar fell against both the pound and the euro yesterday as Federal Reserve Chairman Ben Bernanke offered a somewhat vague report on the state of the US economy and remained tight lipped about the potential for any further stimulus measures in the near term. In a semi-annual monetary policy to the Senate Banking Committee, Federal Reserve Chairman Ben Bernanke stated that recent economic data had been “generally disappointing” and that the central bank is “prepared to take further action as appropriate”. He also said the US recovery is being hindered by Europe’s debt crisis.
After a spate of decidedly mixed economic data, analysts had been expecting a more aggressive approach from Bernanke or at the very least some hints at further monetary stimulus.
Today should be an interesting day as data out includes the latest UK unemployment and average earnings data and the publication of the minutes of the BoE meeting from the beginning of the month when the Monetary Policy Committee announced the extension of their Quantitative Easing (QE) program by £50 billion to £325 billion. The minutes will show how the nine member committee voted and so give a hint as to future policy. Ahead of the publication of the minutes this morning, MPC member Paul Fisher told the Treasury Select Committee that in his opinion, the central bank will not be attempting to ‘exit’ monetary policy “any time soon”. Nonetheless, he does believe that policy-makers ought to review the conclusions of their prior and considerable studies of how to do so.