By Claire West

Sterling has come under pressure this morning after UK CPI data came in under forecast, easing to 3.4% in May. The pound fell 0.13% against the euro to 1.2057 and 0.32% against the dollar to $1.4697.

Economists had forecast an annualised rate of inflation of 3.5%. May’s figure of 3.4% still remains well above the Bank of England’s target of 2%.

Mark Bolsom, Head of the UK Trading Desk at Travelex Global Business Payments comments, “On one hand, the Bank of England will be pleased because they have always said the rise in inflation was temporary. Doubtless the pound’s better performance against the euro will have helped because we import heavily from Europe. It is too early to tell whether this is the start of a downward trend in inflation.

“On the other hand, it will concern investors that whilst inflation has eased, the Bank has done nothing to influence this. The Bank will not raise interest rates whilst Britain faces a period of extensive fiscal tightening and we remain vulnerable to a rise in inflation. If commodity prices rise, sterling drops back against the euro and food inflation rises, inflation will go up again.”

Sterling’s downside is likely to be limited today, as the Retail Price Index rose to 5.1%, which was slightly above forecasts of 5%.