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Pound sterling falls to almost eight-year low against the euro as inflation comes in lower than expected

Analysts say sterling could fall to parity against the European single currency if the likelihood of a bad Brexit deal increases

Ben Chapman
Tuesday 15 August 2017 15:10 BST
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Sterling briefly slumped to €1.0949 against the single currency - its lowest level in almost eight years - before paring some of its losses
Sterling briefly slumped to €1.0949 against the single currency - its lowest level in almost eight years - before paring some of its losses (Reuters)

The pound fell against the dollar and the euro on Tuesday after inflation came in below expectations, lowering the likelihood of an imminent interest rate hike from the Bank of England.

Sterling slumped 0.45 per cent to €1.0954 against the single currency - its lowest level in almost eight years. The last time a pound bought so few euros, in October 2009, the UK economy had recently emerged from one of the deepest recessions its history.

Morgan Stanley analysts last week forecast that the currency could fall below parity for the first time ever by early 2018.

The pound saw more drastic falls against the dollar, trading 0.83 per cent down on Tuesday at $1.2857.

The latest falls came after the Office for National Statistics reported that prices rose at an annual rate of 2.6 per cent in July on the consumer price index measure - less than the 2.7 per cent economists had predicted.

There had been talk that the Bank’s Monetary Policy Committee would soon raise its key benchmark interest rate from the current historic low of 0.5 per cent, in order to cool rising inflation, but the latest figures will have eased pressure to do so. Higher interest rates typically boost the value of a currency.

Adam Cole, Head of FX strategy at RBC Capital Markets said worse could be to come for the pound as Brexit talks continue to falter. He said euro parity was “within the bounds of possibility”, though he is not currently predicting it will fall to that level.

“There is no end of potential political stumbling blocks and we could could see the situation blow up come September after the Parliamentary recess ends and we’ve had the party conferences,” Mr Cole said.

“We tentatively have the pound bottoming out against the euro at the end of this year but it could continue to fall. We’re putting about a 30 per cent likelihood of another general election next year which will add another layer of uncertainty.”

He described market reaction to inflation figures as “knee-jerk”, adding that the more important indicators were GDP growth and Wednesday’s upcoming data on wages.

“We saw a lot of data that surprised on the up-side after last year’s EU referendum and we’re now starting to see that reversed with consensus GDP estimates consistently being revised down," he said.

"The balance from positive to negative news has clearly shifted, if you look at the last three months.”

Credit Suisse’s global head of currency, Shahab Jalinoos said of the inflation data: “Softer-than-expected UK CPI numbers undermine the case for Bank of England rate hikes and open the way for greater GBP weakness than markets had anticipated”.

He agreed that political developments are likely to have a larger impact on the pound than economic releases.

“If Brexit negotiations look like leading to a transitional agreement that allows for the UK to stay within the Customs Union for 3 or more years after March 2019, the GBP will outperform expectations,” he said.

“But news that solidifies the odds of what could be defined as a disruptive outcome, such as a sudden departure from the Customs Union in March 2019, would be taken badly by GBP and would allow for a view that parity in EURGBP is possible.”

Consumer price inflation came in lower than expected in July on the back of another sizeable fall in fuel prices, but retail price inflation beat estimates spelling a larger rise in rail fares next year.

The annual rate of CPI inflation was 2.6 per cent in the month, level with June's figure.

However, RPI inflation, which although stripped of its "national statistic" status is still used to benchmark rail price increases for next year, came in at 3.6 per cent, higher than the 3.5 per cent expected in the Square Mile.

This means large fare increases for passengers as most 2018 rail fare increases for private train operating companies have been capped by the government at the rate of RPI inflation for July in the previous year.

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