Inflation in the UK fell to a 5 year low yesterday stoking fears that further QE could be on the horizon.

CPI fell to 1.1% on a year on year basis as oil, gas and other fuel prices weighed. 1.1% is of course only a couple of bps above the level where Governor Mervyn King will have to write a letter to Chancellor Darling to explain why there is such a deviancy from the 2% target. I don’t expect inflation to stay this low for long: certain elements that have dragged it lower such as the VAT cut from last year will fall out come November / December time and CPI should recover fairly healthily.

After a poor CPI you would have expected, as we did, that sterling would fall off a cliff: not so. Charlie Bean talked about the effectiveness of QE and the need for the MPC to “gradually remove stimulus on a pickup” in growth, which moved GBP higher. I don’t what’s more surprising; the fact that sterling was higher after such a poor CPI figure or that it was a member of the Bank of England that caused it!

US earnings season was in a mixed mood as declines in earnings for Johnson & Johnson were outweighed by gains for Intel and shifts higher in the price of crude close to its yearly high of $75 a barrel. These shifts saw dollar slacken against the EUR, JPY and the commodity currencies.

Noises from New Zealand make it sound like they are gearing up to follow the Australians in hiking interest rates soon. The RBNZ have decided to close off its Term Auction Facility and withdraw the weekly Reserve Bank bill tender amongst other things. These are seen as bullish movements by the RBNZ and could lead to interest rate rises. NZD is higher as a result overnight.

Data today includes further news from US earnings season, UK unemployment, US retail sales and the latest minutes from the FOMC.

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