Currency Note Sterling

UK inflation falling into negative territory hurts sterling

By Ricky Bean October 14th, 2015

Sterling struggled on Tuesday, falling to an eight-month low against the euro and close to levels last seen in 2014 as UK inflation fell into negative territory for the first time since May. With news emerging that SABMiller had accepted the latest takeover bid from AB InBev, sterling had initially found strong support ahead of the opening of UK markets.

However, with inflation forecast to remain level at 0% growth, sterling found itself under pressure ahead of this release. Negative inflation of -0.1% then saw sterling plummet over a cent against both the euro and US dollar in the wake of this release, as well as falling across the board. Should inflation remain negative for an extended period, this will significantly lower pressure on the Bank of England to raise interest rates, and could see sterling suffer further.

Today we could have the reverse situation with the release of labour data from the UK, and particular emphasis is likely to be placed on the average earnings figures alongside the unemployment rate. Should the UK economy continue to show strong wage growth, it would suggest that the slack is being taken up in the UK jobs market, which could see sterling regain some lost ground. The reverse, i.e. earning growth not meeting expectations, could be more bad news for sterling.