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Positivity Despite Falling UK Inflation

Positivity Despite Falling UK Inflation

Good morning. It was a bit of a mixed day for Sterling yesterday as inflation figures came out much worse than expected, down to 0.5% from the previous reading of 1.0%. This was the first time in history that the inflation figure had halved and this level is a 15 year low. A drop wasn’t entirely out of the blue as analysts were expecting a figure of 0.7%.

Mark Carney, who is sharpening his pencil as he has to write an open letter to George Osborne, expects a further decline courtesy of lowering oil prices and a softer inflation outlook. However, whilst the UK decline is mirrored in falling food and energy prices, this is seen as positive for consumers as it boosts their spending power. Falling inflation in the Eurozone is not so positive as it is due to the high unemployment rate, stagnant wages and weak consumption. We are a fair distance away from the 2.0% target and this is most likely to mean that any talk of a rate hike is firmly on the backburner.

We saw GBP/EUR go above 1.2800 yesterday and sit comfortably over that level overnight.

The World Bank painted a gloomy picture of the global economy yesterday by cutting its global growth forecast from 3.4% to 3.0% for this year. Financial volatility, geopolitical tensions and the stagnation issues of Europe and Japan are the biggest dangers for financial stability. These far outweigh the good work being done in the US and this disparity is also a worry.

There is also further bad news for the Euro as the arrival of Quantitative Easing looks imminent. Falling oil prices could well outmuscle the impact of this programme and we may see that it makes no difference to the European economy.

Major news out today includes industrial production from the Eurozone, mortgage applications from the US and Mark Carney speaking.

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