• Pound, Swedish krona driven by inflation giving policy clues
  • Price growth is the `key variable' for central banks: Commerz

The contrasting fortunes of the U.K. and Swedish currencies highlight how even a small change in inflation can send exchange rates rising, or falling, as investors use the data to gauge the policy direction of their central bank.

The pound was the second-biggest loser among rich-world currencies on Tuesday, while the krona posted the largest gain as the nations announced muted changes in consumer-price growth. Annual inflation in Britain fell to minus 0.1 percent in September, against economists’ forecasts for the rate to remain stuck at zero. Prices in Scandinavia’s largest economy rose 0.1 percent, also against a prediction of nil.

Yet while neither figure deviated much from the estimates, the data are significant in terms of influencing policy -- particularly the U.K. report.

“We know both central banks are focusing on inflation at the moment -- that’s the main variable they’re looking at,” said Thu Lan Nguyen, a strategist at Commerzbank AG in Frankfurt. “Then it makes sense that even a small deviation from the expectations causes a reaction like this.”

1960 Redux

Inflation in Britain turned negative for only the second time since 1960, reducing the prospect of an interest-rate increase from the Bank of England which has spurred sterling higher versus most of its major peers this year.

That Swedish price growth unexpectedly turned positive still leaves inflation short of the Riksbank’s 2 percent target and won’t prevent officials from easing policy this month, Andreas Wallstrom, chief analyst at Nordea Bank AB in Stockholm, wrote in a note.

The pound weakened the most in three weeks against the dollar and Europe’s single currency, sliding to an eight-month low of 74.93 per euro. The krona advanced to 9.2343 to the euro, its strongest level since July.

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