Sterling down, euro up slightly

With the release of weak inflation data that seemed to call for the lowering of interest rates, sterling fell in relation to the US dollar and the euro on Tuesday. The British currency was down 0.3 percent against the US dollar to $1.7364 and it lost 0.4 percent to the euro, to £0.6856.

Data released on Tuesday showed that deflation was widespread, as prices for clothing and footwear dropped by 4.7 percent year-on-year in January. This followed a 4.2 percent price decline in December. The declines offset price rises in transport, fuels, and lubricants prices. All in all, January’s headline Consumer Price Index inflation was at 1.9 percent, lower than the Bank of England’s target of 2 percent.

Analysts said that price drops were likely due to a reluctance to pass on higher costs because of intense competition. They also said that inflation was expected to continue its downward trend, possibly leading to interest rate declines and a continued weakening of sterling through the second quarter of 2006.

Elsewhere, the euro was a bit stronger, increasing by 0.1 percent to $1.1902 in relation to the US dollar. The shared currency was trading at ¥139.77 against the Japanese yen.

The euro was helped by the ZEW index, which showed the German economy upbeat despite a bit of a decline in the expectations index, which fell to 69.8 in February, slightly below the expected level of 71.0 but still close to a high due to gains since November.