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Inflation dip a breather or a trend?

Inflation dip a breather or a trend?

GBP
UK consumer prices dipped to 3.0% year-on-year from 3.1%, in line with consensus forecasts, despite growing 0.4% in December. The core rate declined to 2.5% from 2.7%, although the RPI inflation rate increased to 4.1% from 3.9%. With the data broadly in line with expectations and a slight easing of upward pressure on producer prices, the overall market reaction was limited. Sterling drifted a little lower on the perception that inflation pressures may have peaked and that the pace of monetary policy tightening wouldn’t need to be quickened. 

Sterling support held the Pound above 1.3700 against the Dollar before a push back towards the 1.3800 area. The Euro showed little change, closing near 1.1235 after resisting a break above 1.1285. The Pound was resilient despite a dip in oil and commodity prices as wider Dollar moves tended to dominate. Sterling pushed to 18-month highs near 1.3840 overnight before retreating back below 1.3800 as the Dollar recovered ground in choppy trading.

USD

In a quiet day for the Dollar yesterday, the US Empire State manufacturing index rose to 17.7 for January. Further, sentiment surrounding manufacturing conditions continued to be positive as 32% reported improving conditions and 15% reported conditions had worsened. The US Dollar index regained its losses after a four-day slump with a 0.4% rise.

Today, the Fed publishes its Beige book, assessing the economic state for all twelve regional districts. Speeches from Dallas Fed Kaplan and Cleveland Fed Loretta Mester are due.

EUR

The Euro fell from its three-year high yesterday after sources close to the European Central Bank (ECB) said that the central bank was unlikely to tweak it’s policy message too soon and, therefore, left markets thinking Quantitative Easing would continue for some time to come.

ECB officials were sending mixed signals with French Governor Villeroy citing FX moves as a source of uncertainty, while German Bundesbank Governor Weidmann noting that forecasts say that a mid-2019 ECB deposit rate hike is realistic. While rate hike comments support the single currency, it is likely that Villeroy’s cautious approach reflects the majority of the Government Council thinking in the ECB and limits the Euro’s rally for now.

In the Euro area, we are due to get the final December HICP inflation figures. Overall, the market expects core inflation to average only 1.1% in 2018, in line with the ECB’s new forecasts.

Data To Watch:

10:00 EUR Consumer Price Index – Core (YoY) (MoM) (Dec)
10:00 EUR Consumer Price Index (YoY) (MoM) (Dec)
11:45 GBP MPC Member Saunders Speech
14:15 USD Industrial Production (MoM) (Dec)
14:15 USD Capacity Utilization (Dec)
15:00 USD NAHB Housing Market Index (Jan)
19:00 USD Fed’s Beige Book
20:15 USD FOMC Member Kaplan Speech
21:30 USD FOMC Member Mester Speech

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