Inflation miss strengthening rate cut calls
Bank of England Monetary Policy Committee member, and known hawk, Michael Saunders hinted the central bank may cut the interest rate, and if necessary it should be done swiftly. Risk management considerations also favoured a relatively prompt and aggressive response to downside risks and a rate cut now would not be described as precautionary. UK consumer prices stagnated in December and the year-on-year rate dropped to 1.3%, below the expected 1.5% and a 3-year low. Core inflation also fell to 1.4% from 1.7% and below consensus forecasts of 1.7%. The disappointing inflation releases reinforced expectations the Bank of England would move to cut interest rates and Sterling dipped lower once again.
The Pound did find support below 1.3000 on the Dollar and recovered to around 1.3040 as the Dollar slipped and global trade hopes rose. Sterling opens this morning relatively steady around 1.1695 on the Euro.
US producer prices increased 0.1% for December, slightly below consensus forecasts with a 1.3% annual increase from 1.1% previously. Core prices were slightly below market expectations with a 1.1% annual increase from 1.3% The January New York Empire manufacturing index strengthened to 4.8 from 3.3 and slightly above expectations. New orders increased at a faster pace while employment indices were little changed. There was a notable pick-up in monthly price indices which suggested increased inflationary pressures while companies were slightly less optimistic over the outlook.
Philadelphia Federal Reserve (Fed) President Harker stated that the Fed could implement some form of forward guidance by allowing inflation to rise above 2% which was a slightly more dovish slant on potential policy with strong resistance to any rate increase. The Fed’s Beige Book reported that economic activity continued to expand modestly, although manufacturing was essentially flat in most districts.
The Euro exited a two-week-long bearish channel against the Dollar yesterday and is now trading just a few pips short of the weekly tops near 1.1160. The common currency traded on a positive note helping exit a falling channel despite Industrial Production data release coming out below expectation and a softer Eurozone trade surplus.
Across the pond, If the softer tone in treasury yields persists, the Euro could continue to gain against its Dollar counterpart. As of writing, EUR/USD finds around 1.1145.
Data to watch
09:30 – GBP – BOE Credit Conditions Survey
12:30 – EUR – ECB Monetary Policy Meeting Accounts
13:30 – USD – Core Retail Sales
13:30 – USD – Retail Sales
13:30 – USD – Philly Fed Manufacturing Index
15:00 – USD – FOMC Member Bowman Speaks
18:00 – USD – EUR – ECB President Lagarde Speaks