Inflation rises as lockdown eases
The Pound shrugged off negative negative again and posted notable gains despite a lack of confidence in the economic outlook and Brexit trade uncertainty. Sterling strengthened to the 1.3250 area on the Dollar after the break above 1.3200 triggered further buying demand. Ground was also made up on the Euro despite it’s own strength, reaching the 1.1100 mark again. The EU trade talks were of interest with markets keen to hear how the trade talk dinner might influence the tone. Overnight reports indicated that there were disagreements over UK trucker’s access to the EU.
The Chambers of Commerce released a cautious report showing a lack of recovery momentum and cash flow problems for UK companies.
UK CPI inflation has increased to 1.0% year on year for July, up from 0.6% and above market expectations of 0.6%. The core CPI figure increased to 1.8% from 1.4% year on year but there are expectations of a notable decline next month as targeted VAT cuts lower prices. The data meant Sterling made move above 1.3250 on the Dollar and could potentially trigger a slight Bank of England rethink.
US housing starts strengthened to an annual rate of 1.50mn for July from 1.26mn the previous month and well above consensus forecasts of 1.24mn. Building permits also strengthened to 1.50mn from 1.26mn and above market expectations of 1.32mn.
Following the strong NAHB reading on Monday, the data reinforced expectations that the very low level of interest rates was boosting activity in the construction sector.
The dollar was unable to derive any support from the data, especially as positive data tends to undermine any defensive US currency demand.
US currency sentiment remained depressed with the underlying lack of yield support an important negative factor and markets looking to target 1.2000.
The Euro maintained a strong tone yesterday and a decisive break above the 1.1900 level triggered fresh Dollar selling. The Euro posted fresh 27-month highs above 1.1950 while the Dollar index slumped to 27-month lows.
Markets remained on alert for any potential protests against currency moves by the ECB and there was also speculation that the central bank could increase bond buying given the disinflationary impact of Euro gains. There were also concerns over the risk of a sharp correction if short Dollar positions become over-extended, especially with a lack of liquidity during the August period. Germany reported a further increase in coronavirus cases and Chancellor Merkel warned against further easing measures.
As of writing, the Euro trades around the 1.1930 mark against its US counterpart.
Data to watch
14:30 – USD – Crude Oil Inventories
18:00 – USD – FOMC Meeting Minutes
All Day – All Currencies – OPEC-JMMC Meetings