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Lower inflation expectations not good for GBP

Lower inflation expectations not good for GBP

The UK inflation report released yesterday showed that the MPC now expect two-year inflation to be lower despite raising the near term projection. Their central inflation projection for two years ahead is 1.6%, about 0.2% lower than in February. The growth forecasts were also lowered in the near term reflecting a poor Q1 2012 and on-going concerns regarding the Eurozone, effectively pushing out the projected recovery. This has seen speculation regarding the need for further quantitative easing return to the market.

There was a surprise fall in the UK’s unemployment of 13,700 in April with the jobless rate reducing to 8.2% compared to forecasts of an increase to 8.4%. This is the largest fall since July 2010 pointing to some underlying resilience in the economy. Whilst this is welcome news, most of the improvement is down to increasing part-time employment, with many still unable to find full-time work.

In the US the FOMC minutes for April saw no policy changes and little change from the March statement. The minutes showed little support for additional asset purchases in the near-term, however several members have said additional support may be needed “if the recovery lost momentum or the downside risks to growth became great enough”.

In summary, the USD registered further gains as on-going worries regarding the Greek political situation saw a further shift toward safe havens. The Euro slipped to a new four month low of $1.2679 against the USD before staging a recovery. Sterling also slipped against both the USD and Euro as speculation of the need for more QE returned.

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