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Inflation on the rise?

Inflation on the rise?

Sterling weakened on the day following inflation data, with the UK currency moving back below its previous highs.

UK consumer prices declined 0.5% last month and the year-on-year figure increased to 1.8% from 1.6%. This was the highest rate since June 2014 and lower than market participants’ forecast. There was significant upward pressure on transport costs which was offset by a decline in clothing prices. This data may well dampen expectations that the Bank of England will tighten monetary policy sooner rather than later to curb inflation. There was a larger than expected upbeat number in producer prices which suggests underlying pressures may be building.

All eyes will be on the UK’s labour market figures that are due today, with market predicting that jobless rate will be at 4.8% in December and the Claimant Count Change will increase by a meagre 1K in January.

In the US, disappointing inflation figures coupled with the hawkish tone from the Chairwoman of the Federal Reserve System (Fed), Janet Yellen, at her testimony yesterday prompted Dollar buying. This caused the retracement of around a cent from the GBPUSD highs of the day yesterday.

In fact, the Greenback largely benefited from Yellen’s hawkish message at her Senate Banking Committee testimony. She once again advocated for gradual rate hikes and added that it would be ‘unwise’ to wait too long to raise rates. Yellen’s comments triggered a US dollar purchasing spree against a basket of currencies and this opened the door to possible rate hike in March.

Today, the Fed Chairwoman’s second testimony is due along with inflation figures tracked by the CPI, Retail Sales, the NY Empire State manufacturing index, Industrial Production and the NAHB index.

The Euro continued to fall yesterday amid a slew of less than encouraging economic data emerging from the Eurozone. The Euro area’s Gross Domestic Product (GDP) for the last quarter of 2016 grew by 0.4% against prior consensus expectations of 0.5%. German GDP also disappointed at 0.4% against a 0.5% forecast. The picture for GBPEUR remains fragile, but this is partially due to Euro weakness, rather than outright Sterling strength.

Data to watch: 8:00 EUR Non-monetary policy’s ECB meeting, 9:30 GBP UK labour market figures, 13:30 USD Consumer Price Index Ex Food & Energy, 13:30 USD Consumer Price Index, 15:00 USD Fed Yellen Speech.

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