Sterling fell to a five-and-a-half month low against the euro, nearing its weakest level in a year after a surprise drop in UK inflation rate dented speculation of a near-term rise in interest rates. Annual inflation fell for the first time since last summer, to 4 percent in March, easing pressure on the Bank of England to increase rates at a time when the economy remains fragile.
The euro jumped as high as 89.03 pence, in sight of the October high of 89.41 pence - which would mark its highest since late March 2010. A test of this level looks "very achievable in the near term," Childe-Freeman said. The euro was last up 0.75 percent at 88.93 pence, buoyed by the contrasting interest rate outlooks in the UK and the eurozone, where rates are seen rising further in the coming months after a European Central Bank hike last week.
If it breaks 89.41 pence, the euro could be poised for a rise towards its March 2010 high of 91.50 pence. UK interest futures rallied after the CPI data as investors adjusted rate expectations. Although inflation is still two percent above the BoE's target, investors are not fully pricing in a 25 basis point rate hike until October. Sterling lost more than a cent on the day versus the dollar to hit a one-week low of $1.6227. It pared losses later, recovering to 1.6288, although this was still well below a 15-month high of $1.6430 hit last week.
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