Inflation remains inflated
January’s UK consumer inflation fell 0.5% (seasonal) but the year-on-year rate held at 3% against expectations of a small decline to 2.9%. The core rate increased to 2.7% from 2.5%, beating consensus forecasts of a slight increase to 2.6%. Output price growth was more modest than forecast, but evidence of higher service sector inflation maintained expectations of a Bank of England rate move within the next few months. Markets continued to focus on a potential May rate hike which underpinned the Pound. Although Sterling moved higher in response to the data release, it was again unable to maintain the gains as the Euro found support above 1.1300.
Overall, Sterling was hampered by fragile risk conditions and a decline in oil prices with political reservations still significant. The Euro nudged above the 1.1235 level despite a slight narrowing of bond yield spreads and Sterling dipped against the Dollar, although it moved back to near 1.3900 on Wednesday as the US currency came under pressure.
In a weak economic calendar, US small business optimism increased to 106.9 in January. Further, Cleveland Fed President Loretta Mester, in a generally sweeping statement, said she is in favour of rate rises at a pace similar to last year but the impact of tax and other fiscal policy changes should be watched.
The big story today is the release of Retail Sales and Consumer Price Index (CPI) data. Retail sales are forecasted to rise 0.2% m/m with core retail sales expected to rise 0.4% m/m in January. Further, CPI consensus is a rise by 0.3% m/m while decelerating to 1.9% y/y, coupled with core inflation expected to decelerate to 1.7% y/y in January from 1.9% in December.
Looking at recent times, US treasury yields were sent higher off the back of rising inflation fears. The fact that the cost of living has the potential to increase from inflation to match the rise in wages growth negates the overall net increase in wealth of the US consumers. These fears, therefore, have the potential to re-emerge today and will be watched closely.
Bundesbank president Jens Weidmann stated that there was no need for the European Central Bank (ECB) quantitative easing (QE) programme to be extended beyond September. ECB President Mario Draghi maintained an optimistic growth outlook and, with no direct references to monetary policy, the lack of comment on Euro strength underpinned the currency.
Data to Watch:
07:00 EUR Gross Domestic Product w.d.a (YoY) (Q4)
07:00 EUR Harmonised Index of Consumer Prices (YoY) (Jan)
07:00 EUR Gross Domestic Product (QoQ) (Q4)
07:00 EUR Gross Domestic Product (YoY) (Q4)
08:00 EUR German Buba President Weidmann speech
08:50 CHF SNB Gov Board Member Zurbrugg Speech
09:00 EUR Gross Domestic Product (QoQ) (Q4)
09:00 EUR Gross Domestic Product (YoY) (Q4)
10:00 EUR Gross Domestic Product s.a. (YoY) (Q4)
10:00 EUR Gross Domestic Product s.a. (QoQ) (Q4)
10:00 EUR Industrial Production s.a. (MoM) (Dec)
10:20 EUR ECB’s Mersch speech
11:20 CHF SNB Gov Board Member Zurbrugg Speech
12:45 EUR ECB’s Mersch speech
13:30 USD Retail Sales (MoM) (Jan)
13:30 USD Retail Sales control group (Jan)
13:30 USD Retail Sales ex Autos (MoM) (Jan)
13:30 USD Consumer Price Index (MoM) (Jan)
13:30 USD Consumer Price Index Ex Food & Energy (MoM) (Jan)
13:30 USD Consumer Price Index Ex Food & Energy (YoY) (Jan)
13:30 USD Consumer Price Index (YoY) (Jan)