Pound Sterling Exchange Rate little changed as inflation hit 4-year low

The Pound remained close to a six-week low against the US Dollar and was weaker against the Australian Dollar on Tuesday before firming against the Euro as data showed that UK inflation hit a 4-year low.

The UK’s inflation rate as measured by the Consumer Price Index dropped to its lowest level in four years. According to the Office for National Statistics the CPI fell from January’s figure of 1.9% to 1.7% in February.

The decline is the second consecutive month that the inflation rate has been below the Bank of England’s target rate of 2%. The decline reduces the squeeze on UK household incomes and the gap between inflation and average wage growth is now at its narrowest level since April 2010. The last time wages outgrew inflation was in 2008.

The main cause for the decline in inflation was the softening of fuel prices. The ONS said that petrol prices in the UK fell by around 0.8p per litre between the first two months of the year, a stark comparison to the 4p rise recorded in the previous year. The price of clothing also rose at a slower pace compared to last year.

Sterling remained weaker against the US Dollar as investors look ahead to this afternoons US Consumer confidence and new home sales data.

Against the Euro the Pound recovered some ground due to release of a weaker than expected IFO confidence report. Confidence softened in March due to the crisis in Ukraine and its potential impacts upon German business.