Sterling bounces back despite inflation figure

Sterling bounced back against the single currency yesterday after better-than-expected economic data and rising equity markets boosted the pound.

• Sterling initially benefited with better-than-expected housing and retail sales figures being released early on Tuesday morning.
  
• Inflation figures were released in the UK that were as expected – the consumer price index fell below the Bank of England’s target of 2% for the first time since September 2007, whilst the retail price index stands at -1.6%
  
• With the inflation figures coming in as expected, it seems that the Bank of England has room to keep interest rates on hold at 0.5% and possibly extend its quantitative easing programme further as deflation seems the most imminent threat, and they will worry about inflation in the future.
  
• Bank of England policymaker-desgnate Adam Posen said he expected the UK currency to trade higher against the euro in the medium term.
  
• Within Germany, ZEW released their economic sentiment survey that revealed a decline in economic expectations within Europe’s largest economy. The indicator dropped to 39.5 points, whilst analysts were expecting it to rise to 48.0 points.
  
• The pound was further boosted with the equity markets doing well – the FTSE 100 rose 0.9%, with miners, banks and oil groups doing particularly well. The banking sector was buoyed by Goldman Sachs stellar second-quarter results.
  
• Within the UK this morning, investors will take note from unemployment data being released, whilst within the eurozone, the consumer price index is released.