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Inflation, as measured by the Office for National Statistics’ Consumer Prices Index (CPI), jumped to 2.3% in February – up from 1.8% in January. The increase has pushed the rate above the Bank of England’s (BoE) 2% target. The result is the strongest seen in many years and now places increasing the pressure on the BoE to raise interest rates in the medium term.
The CPI figures show fuel and food prices are rising, partly caused by the fall in the value of the Pound, but also by the end of supermarket price wars. Prices at the factory gate are also rising quickly, suggesting more inflation is on the way to the High Street.
The immediate response to the inflation data was a sharp rise in the value of the Pound against most currency pairs. Cable (GBPUSD) rose to a high of 1.2475, which suggests that we could see prices creeping back above the key 1.2500 level in the near future.
Much of the bullish activity seen in the market is due to rising speculation that the Bank of England is going to have to raise rates to fight off the growing inflationary pressures in the short run. The monetary policy committee is not due to meet again until the middle of May, but the meeting is set to be a ‘live’ event and there is a very real risk of a 0.25% hike to rates, especially if the CPI figures keep rising.
Investors are raising fresh concerns over some of US President Donald Trump’s policies, as the US president struggles to conquer healthcare reforms, implying that he may face troubles delivering on his promises over corporate tax cuts. Cleveland Fed President Mester stated that she was expecting two further rate increases in 2017 while Boston head Rosengren remained uneasy surrounding the commercial real-estate market.
Today, existing Home Sales and the Energy Information Administration’s weekly report on crude inventories are due across the pond, which we don’t expect to cause huge volatility.
On the Euro front, investor concerns surrounding the French presidential election continue to ease after Le Pen came in joint last place, out of five, in the Elabe poll. The poll also forecast Macron beating Le Pen by 64% to her 36% in the second conclusive round. The reduced expectations of a win for Le Pen means less chance of a French EU referendum, providing support for the Euro.
Overall bond yield spreads continued to move in favour of the Euro as German rates moved slightly higher and US rates edged lower, which also provided net support for the single currency. There were some further reports that the European Central Bank (ECB) was looking at ways to reduce the amount of monetary stimulus with speculation over the potential for some form of rate hike in September.
Data to watch: German 10yr Bond Auction. 1pm US Housing Price Index (Jan). Swiss SNB Quarterly Bulletin.