UK inflation less than expected, German ZEW rises, Eurozone inflation in line with expectations

The pound to euro exchange rate is 0.25 pct in the red at 1.1531 - sterling has come under renewed selling pressure following on from the release of the latest inflation data from the UK economy.

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UK inflation: It is heating up, but not fast enough

Fresh woes for the British pound were sparked today when it was shown that the rate of consumer price index (CPI) inflation increased to 2.9 pct in June, up from 2.7 pct in May.

Investors had expected a reading of 3 pct - thus inflation has come in below expectations.

The feeling amongst currency traders is that this allows the new Bank of England Governor the opportunity to restart the quantitative easing programme - a big negative for sterling.

According to Richard Driver at Caxton FX we should brace for further declines in the pound to euro exchange rate:

"The BoE has license to tolerate periods of high inflation, as supporting growth is the key objective. Nonetheless, high inflation levels will still be a key factor under consideration when the BoE is considering the option of more QE. This pair trades at €1.1550 and it still feels as though another move lower is around the corner."

For the pound euro exchange rate it is also important to consider the inflation data released in the Eurozone at 10AM.

Eurozone annual inflation increased 1.6 pct in June, up from the 1.4 pct growth registered the previous month. This result is in line with projections, hence why it is essentially a neutral outcome for GBP-EUR.

Boosting the euro was news that the much anticipated ZEW Survey on Economic Sentiment (July) rose from 32.8 vs expectations of 30.6 for the Eurozone.

The German number rose to 36.3 vs expectations of 38.5.

Quantitative easing to blame for UK's high inflation

Even though inflation came in below expectations it remains high.

Marcus Bullus, trading director at MB Capital, has laid the blame for today's strong inflation reading squarely at the door of the Bank of England's quantitative easing programme.

However, Bullus believes that today's high inflation is unlikely to prevent yet more money printing. The reaction of the British pound to today's figures would suggest that the broader markets agree with this viewpoint:
 
"Britain's inflation climate has mirrored its summer weather. Out of nowhere it has become oppressively, uncomfortably hot - and has now stayed that way for two months.
 
"April's CPI figure, like its temperature, was reassuringly mild. But it leapt in both May and June, in the clearest sign yet that years of loose monetary policy could finally be causing inflation to overheat.
 
"While growth was negligible or in reverse, QE's inflationary pressure was kept in check. Now GDP is surging ahead, the side effects of all that money printing are becoming clear.
 
"A warning light has just come on on the economy's dashboard.
 
"The rising cost of living is shredding savers' returns and risks eroding the already weak levels of consumer confidence.
 
"But if the UK's consumers think this is bad, they'll need to brace themselves even harder for what's coming. Inflation looks set to rise even further during the rest of 2013, as Mark Carney has given strong hints that he sees it as a necessary evil in the short to medium term.
 
"Inflation may sap growth, but worse still is the damage it does to stability. Stability is the one thing that policymakers crave above all - and it is in increasingly short supply."