Inflation lower than forecast but sterling still enjoys a “good” day.

A mixed day for sterling saw it fall sharply across the board throughout the morning following lower than expected inflation data, before rallying strongly in the afternoon. The UK Consumer Price Index (CPI) reading was forecast to show 0.7% growth in prices throughout December, but instead revealed a greater reduction in inflation to just 0.5%. This represented the lowest levels of inflation since May 2000 and a higher than expected 0.5% fall from November’s figure.

Despite threatening to reach recent 19-month lows against the US dollar, sterling recovered following comments from Bank of England (BoE) governor Mark Carney. In stating that low inflation would have a positive effect on the British economy in the short term, Carney effectively reduced pressure on the BoE to push an interest rate hike further back. With inflation set to recover to around the 2% level within 2 years, sterling found support as an interest rate increase in late 2015 remained on the cards.

Today we will see Governor Carney speak again before the Treasury Select Committee. We can expect to see volatility around this speech as the markets react to Carney’s views on recent economic data from the UK.