Following the UK inflation data, expectations of a February rate cut will continue.

Sterling strengthened against the dollar in early Europe on Monday, but again failed to break above the key 1.9650 resistance level and weakened back towards 1.9550 later in US trading as rallies were sold into. The UK currency also weakened to fresh all-time lows against the Euro at 0.76. The UK currency found support below 1.9550 on Tuesday with some marginal recovery against the Euro.

Overall sentiment towards Sterling has continued to weaken with expectations of a further economic slowdown. Any move to effectively nationalise the Northern Rock bank could reinforce negative international sentiment towards the UK economy with wider credit fears liable to persist.

Headline consumer inflation was unchanged at 2.1% in December compared with expectations of a small decline to 2.0% while the core rate was unchanged at 1.4%. The data should not have a major impact on interest rate expectations with markets still expecting that the bank will have scope to lower interest rates in February.