The Euro to Pound Sterling (EUR/GBP) exchange rate rallied as UK inflation fell to a record low in January and a Eurozone Economic Sentiment report came in strongly.
The Euro to Pound (EUR/GBP) exchange rate hit a session high of 0.7426
Data released by the Office for National Statistics (ONS) showed that annual Consumer Price Inflation in the UK fell to a record low level of 0.3% in January. The figure is the smallest increase seen since the ONS began producing the data in 1996.
The sharp fall in oil and food prices also saw the monthly inflation rate slide into negative territory of -0.9%. Core inflation meanwhile inched higher to 1.4% on a year on year basis. The data suggests that the UK economy will likely face a period of deflation over the coming months.
Following the release of the data, the Pound dipped against a number of major peers but those losses are likely to be short-lived as the fall in inflation was widely forecast by economists and as some investors see low inflation as a positive for the economy.
‘A lower inflation rate was excellent news for consumer’s purchasing power. With inflation likely to fall further and earnings growth now finally trending upwards, consumers should see appreciable improvement in their purchasing power as 2015 progresses. The rise in core inflation highlights the fact that the UK is far from suffering generalised deflation,’ said Howard Archer, the chief UK and European economist at IHS Global Insight.
The Euro meanwhile recovered some lost ground as data showed that economic sentiment in Germany and the wider Eurozone improved sharply this month, adding to signs that the region could be on the verge of a recovery.
The ZEW Centre for Economic Research said that its index of German economic sentiment rose by 4.6 points to 53.0 this month from January’s reading of 48.4. Analysts had expected the index to improve by 6.6 points to 55.0 in February. The index of euro zone economic sentiment increased to an eight-month high of 52.7 in February from 45.2 in January, above forecasts for a gain to 51.3.
Earlier in the session, the Euro had weakened as the crunch talks between Greece and the Eurogroup collapsed. With the deadline for a deal quickly approaching, nerves are likely to increase. If no deal is achieved by February 26 then Greece will likely run out of cash, an event that could cause the nation to leave the single currency bloc.
Sterling is likely to regain lost ground on Wednesday if the latest UK employment and earnings data comes in positively.
