British Pound Falls Against Euro on Flat Inflation Data

The British pound fell against the euro on Tuesday, after data showed its inflation level remained unchanged in May. At around 10 am GMT, the pound lost 0.1% of its value against the European currency to trade around €1.1351.

The British currency was weakened after Britain's inflation rate remained stable in May. According to the Office for National Statistics data, the British consumer price index rose 4.5% in May, compared to a year ago, the same rate as in April. The main upward pressure to the British inflation came from a variety of food products, while the main downward pressure came from the transport sector.

The inflation remained unchanged from April even if measured by retail prices instead of consumer prices. The British retail price index rose 5.2% in May, compared to a year earlier, the same rate as in April.

The British government is getting international praise for its efforts to control Britain's budget deficit. First the IMF openly gave support to the government austerity program and now Moody's has decided to leave its credit rating for Britain unchanged at AAA. The international praises have yet to turn into stronger growth performance in the real economy, however. With the British economy still struggling to find a firm foothold, the Bank of England might postpone its interest rates rises now that Britain's inflation has stabilized.

The euro likely found some strength in the encouraging data from Spain. The Spanish consumer price index rose 3.5% in May, compared to a year earlier, down from 3.8% recorded in April. Decelerating inflation in Spain will ease off pressure on the ECB to increase its interest rates. Maintaining interest rates low will provide a needed boost to the troubled Spanish economy. Many analysts believe Spain might be the next candidate for the IMF/EU bailout and any improvements in the performance of the Spanish economy should be seen as a step forward in regaining the financial stability in the Eurozone. Restoring financial stability in the Eurozone periphery should push the value of the euro much higher.

Traders who believe the British economy will remain subdued, and with inflation under control, which should provide a significant headwind for the pound, will be interested in shorting the CurrencyShares British Pound Sterling Trust ETF (NYSE: FXB).