Danske Bank stays bullish on sterling following inflation report release

Michael Gove and Boris Johnson on the Vote Leave campaign bus in Lancashire as Gove announced he will seek the Tory leadership after concluding Johnson

Laura Parsons, currency analyst at TorFX said: "The GBP/EUR exchange rate continued losing ground on Tuesday despite the United Kingdom publishing stronger than expected inflation data for January".

January's United Kingdom inflation results came in higher than expected in all major prints.

Economists forecast that retail sales will have rebounded from -1.5% to 0.5% in January, with the uptick likely to bolster hopes of a rate hike from the Bank of England (BoE) later this year. So, even a softening of inflation today on less sterling depreciation passthrough is unlikely to change the thinking much within the MPC (monetary policy committee).

United Kingdom core inflation was even more surprising, climbing from 2.5% to 2.7% and beating the forecast 2.6%.

The fact that GBP has made little impact against the Euro, or in fact any of the other major currencies this week, indicates that the reason for the spike is due to investors pulling their funds away from the United States dollars, rather than any overriding confidence in the Pound. Milhoj adds that there is a slight risk of EUR/GBP upside due to Brexit uncertainty in the near-term.

GBP/EUR Exchange Rate Gains SupportThe Pound Euro (GBP/EUR) exchange rate proved resilient on Wednesday, capitalising on the highly anticipated USA inflation readings and the drop in demand for the Euro that ensued. Not only was the previous figure revised lower from 9.7% to 9.6%, but the Q4 figure came in with a notable improvement of 8.9%.

With equity markets recovering from last week's slide on Monday, however, the return of risk appetite encouraged investors to sell dollars and buy back into riskier currencies.

However, the Australian Dollar's strength has been limited with markets still more on the cautious side.

"However, the pound failed to hold on to its gains and slid against the euro ahead of the release of German inflation data and growth figures from the Eurozone".

Brexit negotiations have come back into the media spotlight this week, with the EU's chief negotiator Michel Barnier seemingly irked by comments made by Boris Johnson is his public address yesterday. This headline rate was in line with the Bank of England's inflation report last week but stronger than the consensus forecast of 2.9%.

Influential Australian ecostats will be published on Wednesday and Thursday, which could influence movement in the Australian Dollar to Pound (AUD/GBP) exchange rate towards the end of the week.

If these datasets impress, they could make the Australian Dollar more appealing and help the currency to sustain a recovery against the Pound.

United Kingdom retail sales data from January will be published on Friday morning. It was hoped by this date that the European Union and the United Kingdom would have agreed a transition deal that would allow trade negotiations to begin in earnest. If concerns remain that stocks could fall again, investors may hesitate to buy risky currencies like the Australian Dollar.

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