The higher than expected inflation data is a warning to the Bank of England that it should not be complacent over the underlying inflation risks and will provide initial Sterling support
Sterling found support weaker than 0.90 against the Euro on Monday and also recovered back towards 1.43 against the dollar as international vulnerabilities were important and the UK banking sector attempted to rally from initial losses.
Bank of England Deputy Governor Bean stated that the bank was running out of room on the ability to cut interest rates. He also noted that Sterling’s decline would help close the current account deficit and was necessary to rebalance the economy.
Markets will continue to focus on the potential for quantitative easing and a direct expansion of the money supply as this will remain a potentially important source of medium-term Sterling weakness. Nevertheless, it proved resilient on Tuesday as increased fears over the Euro-zone outlook provided protection.
Headline UK consumer inflation fell to 3.0% in January from 3.1% previously while the core rate was at 1.3% from 1.1%. The higher data will provide initial Sterling support as the Bank of England needs to be very careful over policy. Following the data, Sterling pushed higher to near 1.43 against the dollar from lows below 1.4150.