The Pound remains largely unchanged as consumer price inflation stays unchanged at 2.1%

The resilience of the Pound has surprised many traders in recent weeks as the UK currency held stubbornly above 2.0100 versus the Dollar and clung to the 1.4000 level against the Euro following the Bank of England’s decision to lower interest rates for the first time in two years. Concerns over a renewed credit crunch and slowing economic growth has seen a shift in sentiment within the MPC as policy makers cut interest rates by 25 basis points to 5.50%. It can be argued that the Pound stood firm in the wake of the decision, principally because the market interpreted the move as a one off while the Fed’s policy is firmly set towards further monetary easing in the months ahead. That sentiment was further emphasised in a report last week on UK factory-gate inflation as the output component of the producer price index for November accelerated to the fastest annual pace in 16 years. The monetary policy committee must balance slowing economic growth and rising inflationary pressures and that has prompted speculation that the Bank won’t engage in further monetary easing without due cause. Recent reports have indicated that the decade long housing boom is coming to an end as house prices failed to rise over the past month while growth in UK service industries contracted for the first time this year. In addition, the Pound came under further pressure yesterday amid reports that a broader measure of inflation remained unchanged last month. The UK consumer price index held steady at an annual rate of 2.1%, still marginally above the government’s 2.0%, while the core rate of inflation actually cooled to match the weakest reading in well over a year. The focus this morning will inevitably fall on the minutes from the Bank of England’s last policy meeting and we can expect further downside sterling movement if policy makers indicate that further rate cuts are needed over the coming months.