Currency Watch: Stagflation in the UK and woe in the Eurozone

Yesterday’s Bank of England’s Quarterly Inflation Report highlighted expectations of higher than target inflation and lower than expected growth – another bout of stagflation.

Combined with comments that the MPC is willing to “look through the temporary albeit protracted period of high inflation to support growth and employment” and their similarity to views expressed by Mark Carney in front of the Treasury Select Committee almost guarantee that we will not see any tightening of monetary policy in the UK for a good while now. QE remains an option moving forward, of course, should the data necessitate.

As it always does when Mervyn King speaks, GBP came lower versus the US dollar on the news to fresh six-month lows, and only a strong batch of data is likely to rescue this for now. Retail sales may just be the thing to do it, with expectations of a year on year increase of 1.6%.

The fears over Eurozone growth have also taken the euro lower this week. Germany posted a fall in Q4 GDP of 0.6%, worse than the 0.5% predicted. The data from this year has already suggested however, that the German economy has begun to bounce back strongly from this slump.

The more worrying development has been the deterioration in prospect for France, which also posted a lower than expected figure for Q4 (-0.3% vs -0.2%). Their PMI releases through Q1 have really suggested that French industry is struggling quite badly at the moment. This led to an overall fall in the Eurozone of -0.6% through Q4 –  a continuation of the recession that some commentators had incorrectly thought was over.

All this does is once again highlight the importance of fundamental data and should we see further poor news from the continent in the coming weeks, the recent euro strength should unwind quickly.

Jeremy Cook is chief economist at World First foreign exchange