Sterling Plummets To 6 Month Low Against Euro & 5 Month Low Against US Dollar

Sterling has suffered another setback yesterday morning, after UK data revealed that UK inflation prices are continuing to fall. The inflation rate is now currently at 1.1%, lower than the forecast of 1.3% and significantly down on September's figure of 1.6%.

Sterling plunged after the news emerged, down 0.5 per cent against the Euro to a 6 month low of €1.0640. The pound also slid 0.35 per cent against the US Dollar, a 5 month low, now trading $1.5740.

Duncan Higgins, senior analyst at Caxton FX, said this morning: "Not only is this bad news for the pound, it is also disastrous news for Mervyn King, the Governor of the Bank of England. He now has to write a personal letter to Chancellor Alistair Darling, explaining why the rate has fallen so drastically.

"The CPI figures have weighed heavily on the pound and will continue to discourage investment. Outside of slight profit taking, we are unlikely to see the pound find much support over the short term, and it is now on course to fall to parity with the single currency, particularly as the eurozone continues to emit positive signs. Caxton FX continues to predict parity at the end of October."

Higgins continues, "The only thing that will stop us falling to parity is the news that the UK have emerged from the recession. However, the market is now speculating that growth will be negative or at 0%. We will know next Friday when the GDP figures, retail sales and the Bank of England's MPC minutes come out."

Sterling has come under further selling pressure recently following a report from the Centre for Economics and Business Research, which predicted that UK interest rates would remain at their historic low of 0.5% through 2010.

The report also forecast they would stay below 2% until 2014, and that the pound could fall to just $1.40 and even go below one to one with the euro.

The report has come in the wake of number of weak figures relating to the UK economy and has cast doubts of the strength of the recovery. Higgins says, "Investors are now beginning to price into the market a further extension of the BoE's quantitative easing program in November, which would be particularly damning for the pound as other major economies look set to withdraw their stimulus measures."

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