Trade concerns pushing Sterling lower
UK Consumer inflation (CPI) bounced back to a 6-month high of 1.8% in January, up from the 5-year low of 1.3% in December and and beating consensus forecasts of 1.6%. The unexpected surge vindicates the Bank of England’s decision not to cut rates in January. The core inflation rate also beat expectations in rising to 1.6% from 1.4% and the Pound pushed higher following the release but failed to hold the gains. The Euro recovered after again finding support near 1.2050 and strengthened to 1.1976 late on whilst the Pound sank to lows near 1.2920 against a robust US Dollar with UK/EU trade concerns also a factor.
Today we await the retail sales report but tomorrow’s business confidence data will likely make a bigger splash. Sterling opens close to 1.2900 on the Dollar and 1.1952 on the Euro.
U.S January housing declined slightly to an annual rate of 1.57mn from a revised 1.63mn, although this was well above consensus forecasts while building permits increased to 1.55mn from 1.42mn. Mild weather has marginally boosted construction activity, the data maintained confidence in the outlook. Producer prices increased by 0.5% with the annual increase at a 9-month high of 2.1% compared with presumptions of 1.6% while core prices increased by 0.5% on the month.
Minneapolis Fed President Kashkari stated that the most likely outcome would be for steady interest rates on a 3-6month view before another cut, although rate hikes could be needed if there were positive shocks. The Dollar advanced further and the currency index strengthened to the highest level since May 2017. Minutes from January’s Federal Reserve meeting stated that risks to economic activity were somewhat more favourable than the previous meeting due to an easing of trade tensions.
The Euro has tumbled below the 1.08 figure against the Dollar for the first time in over three years and may be only the first milestone in its downward journey, with economic data, news flow and option market positioning all seemingly stacked against the common currency.
The pair, which are the world’s most traded exchange rate, has weakened roughly 3.5% this year, with the latest drop coming due to a dismal German investor sentiment survey on Tuesday and a forecast-beating U.S. manufacturing gauge highlighting the two economies’ diverging economies. As of writing the the Euro trades at 1.0789 against the Dollar
Data to watch
09:30 – GBP – Retail Sales
12:30 – EUR – ECB Monetary Policy Meeting Accounts
13:30 – USD – Philly Fed Manufacturing Index
16:00 – USD – Crude Oil Inventories