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Sterling suffers on soft inflation

Sterling suffers on soft inflation

GBP
UK inflation (CPI) rose 0.1% in March with the year-on-year increase missing forecasts and declining to 2.5%; the lowest reading for 12 months. The core CPI also declined to 2.3% from 2.4% previously, although output prices were unexpectedly high. Stagnant prices of women’s clothing and tobacco were the main culprits. Another cause was the lack of duty increases as the Budget has moved to the Autumn.

The market reaction was swift as Sterling dipped sharply lower as expectations of a May rate hike were reigned in. The Pound dropped below 1.4200 against the Dollar and 1.1495 against the Euro. Oil prices and confidence in the equity market helped protect Sterling from buckling under the selling pressure, although there were still significant net losses. Today’s retail sales report is expected to be weak with the finger likely to be pointed at the weather again.

USD

On the economic front, the Federal Reserve’s Beige Book demonstrated moderate growth in the economy but not without concerns over trade tariffs. Further, overall upward pressure on wages continued to be modest despite an increasing labour demand while prices increased at a modest pace across all sectors.

William Dudley, the New York Federal Reserve Bank President, in a speech yesterday, supported the cause for gradual interest rate normalization with the neutral rate at around 3% now.

The Dollar recovered from the recent slump against the Pound on the back of weak UK data and direct talks being held with the North Korean leadership. This boosted hopes for a significant de-nuclearisation from Kim Jong-un. Further, US President Trump and Japanese Prime Minister Abe agreed to further bilateral trade talks.

EUR

Eurozone CPI inflation for March reported a downgrade from flash estimates to 1.3%. Core inflation limped in at 1.0% while the measure tracking domestic pressures increased to a four-year high of 1.2% from 1.1%. The Euro dipped lower only briefly as the Dollar was unable to take advantage.

European Central Bank (ECB) member Villeroy stated that there is a high degree of convergence of views on the council and that the bank is following a gradual path of normalisation. Although he stated that policy will remain accommodative after the bond-buying programme ends, markets focused on the prospects for policy normalisation rather than the caveats and the Euro pushed higher.

Italian politics remained an important focus with President Mattarella asking the Senate speaker if he can form a Centre-right/5-star government; both parties are Eurosceptic. Italian bonds made gains so the overall market impact was limited.

Data to Watch:

02:30 AUD Employment Change s.a. (Mar)
02:30 AUD Unemployment Rate s.a. (Mar)
09:30 GBP Retail Sales (MoM) (Mar)
09:30 GBP Retail Sales (YoY) (Mar)
09:30 GBP Retail Sales ex-Fuel (MoM) (Mar)
09:30 GBP Retail Sales ex-Fuel (YoY) (Mar)
13:00 USD FOMC Member Brainard Speech
13:30 USD Continuing Jobless Claims (Apr 6)
13:30 USD Initial Jobless Claims (Apr 13)
13:30 USD Philadelphia Fed Manufacturing Survey (Apr)
14:30 USD Fed’s Quarles speech
17:30 GBP MPC Member Cunliffe Speech
23:45 USD FOMC Member Mester speech

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