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Pound slumps on Carney remarks as markets ignore strong inflation data

The British pound was caught between two directions today after dovish comments from the Bank of England’s Governor contrasted the strong inflation data from earlier in the day. The Bank’s Governor, Mark Carney, reiterated his dovish view on Tuesday saying that he would like to see signs of notable progress in three areas before raising interest rates. They comprise of economic growth accelerating to above trend, domestic cost pressures picking up and core inflation moving towards the 2% target.

Speaking at the Queen Mary University of London, Carney warned on the downside risks from China as well as from the volatility in global financial markets given the open nature of the UK economy. He gave no timetable as to when he expects rates to start rising but said “now is not yet the time to raise interest rates”.

UK GDP growth was revised lower in the second and third quarters of 2015 and wage growth has also moderated. Political uncertainty surrounding the UK’s membership in the EU is also weighing on market and investor confidence.

On Monday, another BoE policymaker, Gertjan Vliegh, gave a downbeat outlook. Vliegh suggested that the next move in interest rates could be down if more “disappointments” were to come regarding the economy.

Meanwhile, the latest UK inflation figures published earlier today showed a surprise pick up in inflationary pressures in December. Headline CPI edged up to 0.2% year-on-year in December, up from 0.1% in November and above estimates that it would stay unchanged. Core CPI also beat estimates, rising from 1.2% to 1.4% in December, the highest in almost a year and compares against expectations that it would stay unchanged. However, for the full year of 2015, UK inflation was at a historical low of 0%.

The pound initially jumped higher when the inflation figures were released, rising to 1.4339 dollars and 0.7589 pounds per euro. But sentiment for the British currency soon turned in the opposite direction as Carney started delivering his speech. Sterling plunged to 1.42 dollars and extended its losses to 1.4128 – a 7-year low – in late European session. The euro soared to a 1-year high, breaching 0.77 pounds to hit 0.7712.

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