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The sharply lower than expected inflation rate will increase pressure for a further interest rate increase to be postponed and this will undermine the UK currency in the short term even if the July data proves to be erratic.

Sterling weakened to five-week lows below 2.01 against the dollar on Monday before a tentative recovery to 2.0120 and managed to regain some ground against the Euro. The UK currency was holding close to 2.01 on Tuesday before weakening sharply after the UK inflation data.

Consumer prices fell sharply by 0.6% in July with the annual inflation rate dropping to 1.9% from 2.4%. The core inflation rate fell to 1.7% from 2.0% while the RPI rate also dipped sharply. There is likely to have been discounting earlier than usual in the season, but the inflation drop will certainly increase pressure for the Bank of England to postpone any further increase in interest rates.

The latest RICS housing-market survey suggested a deterioration in the sector, although the position was still under reasonable control. Given thee extent of market overvaluation, there will be the threat of a much more serious deterioration in confidence which would cause substantial Sterling damage.

Source: Investica

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