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Inflation levels off and the Pound sinks

Inflation levels off and the Pound sinks

GBP
UK consumer prices declined 0.1% in July and the year-on-year rate was unchanged at 2.6% compared with consensus estimates of a small increase to 2.7% for the month. Core inflation was also static at 2.4%, although the Retail Price Index (RPI) inflation rate increased to 3.6% from 3.5% as the decline in transport costs was offset by higher food prices.

The weaker-than-expected data triggered fresh doubts whether the Bank of England would be in a position to raise interest rates which also put Sterling under renewed selling pressure. Sterling reached fresh 10-month lows at a level of 1.0989 against the Euro while there was a decline to 4-week lows near 1.2850 against the Dollar.

Sterling overall remained firmly on the defensive ahead of the latest labour-market data, with expectations of a weak earnings report.

USD

US retail sales increased 0.6% in July, exceeding consensus expectations of a 0.3% gain. Underlying sales also outperformed expectations with a 0.5% gain whilst significant upward revisions to June’s data saw a 0.3% headline gain compared with the 0.2% decline reported previously.

The New York Empire manufacturing index showed firm gains increasing to 25.2 from 9.8 previously, marking the strongest reading for close to three years. This boosts confidence for the manufacturing outlook, especially with increased optimism surrounding the outlook in the Empire survey.

The stronger-than-expected data for July, upward revisions to June data ending the recent run of disappointing retail sales reports, firm manufacturing sentiment, and potential for a further rate hike at close to 50% will boost confidence in the underlying outlook for the US. The Dollar showed this in the market, making gains against its peers and strengthening across the board.

Today’s focus will be the FOMC minutes released this evening which should provide more details on the members’ concerns with inflation and the timing of balance sheet reductions.

EUR

The Euro dipped to below the 1.1700 level against the Dollar yesterday, but again found support and rallied towards the 1.1750 area based on medium-term expectations of European Central Bank (ECB) tightening.

German Q2 GDP data was slightly weaker than expected at 0.6%, although there was upward revision to the first quarter and consequently little market impact. The Euro remained vulnerable to profit taking, especially with a further widening of yield spreads between US and German bonds, but there was still solid buying support on dips.

The ECB Lending Survey suggests that the investment uptrend is building as banks become more willing to lend and firms increasingly look to expand capacity. While risks are skewed to the upside overall, the potential dampening impact of the recent appreciation of the Euro must be kept in mind.

Today we see the Gross Domestic Product (GDP) release, which is a measure of the total value of all goods and services produced by the Eurozone. The GDP is considered as a broad measure of the Eurozone economic activity and health. The preliminary estimate of Eurozone GDP growth for Q2 2017 was 0.6% q-o-q (2.1% y-o-y), in line with consensus expectations.

Data To Watch:
9:30am GBP Claimant Count Change (Jul), ILO Unemployment Rate (3M) (Jun)
10:00am EUR Gross Domestic Product s.a. (YoY)(QoQ) (Q2)
1:30pm USD Housing Starts (MoM) (Jul), Building Permits (MoM) (Jul), Building Permits Change (Jul), Housing Starts Change (Jul)
7:00pm USD FOMC Minutes

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