Sterling picked up from early lows to post marginal gains against the euro yesterday

The pound reversed its three-day slide against the euro as a surprise dip in a German economic sentiment index offset weak UK inflation data.

  • In early trading, sterling was undermined by a declining inflation rate, which prompted further speculation that interest rates could be on hold at 0.5% until 2011 and sent the UK currency to a six-month low of 1.0628.
  • The Consumer Prices Index (CPI) dropped to an annual rate of 1.1% in September from 1.6% in August. Meanwhile, the Retail Prices Index (RPI) inflation measure, which includes mortgage interest payments and housing costs, fell, to -1.4% from -1.3%.
  • However, the pound rebounded strongly after the “positive signs” in the eurozone began to fade, with the German ZEW measure of investor sentiment unexpectedly falling after three months of gains.
  • Additionally, the pound was given slight support in the afternoon after the BoE Deputy Governor spoke more positively about the UK recovery, subduing rising concerns over the health of the economy.
  • Investors took the opportunity to lock in profits, allowing the pound to rally up from session lows to close up at 1.0718.