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UK data surprises the market

UK data surprises the market

GBP 
Sterling fell against both the Dollar and Euro yesterday after economic data showed inflation in the UK unexpectedly slowing for the first time since October last year, lowering expectations of an interest rate hike this year. The Pound jumped last month when various members of the Bank of England’s (BoE) monetary policy committee – including the governor himself – hinted that rates could rise in the coming months. However, the BoE has also made clear that any monetary tightening will depend on data.

This has taken some of the optimism away from the Pound, particularly against the Euro, and has led some strategists to say Sterling is more sensitive to economic indicators than it has been for most of the past year. Despite this, economic data seems to be less important than politics, and that it will be difficult for interest rates to be raised before there is more certainty over Britain’s departure from the European Union.

Yesterday’s economic data releases showed consumer prices rose by 2.6% in June compared with a year earlier, down from a nearly four-year high of 2.9% in May. Some market participants are saying that the BoE rate expectation has not changed following the data, and we are expecting a rate increase by the end of 2018.

USD

The Dollar nursed losses yesterday after reaching a 10-month low against a plethora of currencies as Republican legislators failed in their attempt to pass a stalled healthcare bill. This raised major fears over the remainder of President Donald Trump’s reforms that are on the agenda.

Republican efforts to overhaul or repeal Obamacare collapsed in the US Senate yesterday, rattling financial markets and casting doubt on the chances of getting Trump’s economic plans, such as tax and stimulus reforms, through a divided Congress. The dollar index, which tracks the Greenback against a basket of six major rivals, edged up 0.2% to 94.780 after falling as low as 94.476 on Tuesday, its lowest level since September 2016.

Expectations that the Federal Reserve will be more cautious about increasing rates also helped weaken the Greenback. Economic data released yesterday showed that US import prices fell for a second straight month in June as the cost of petroleum products declined further, suggesting inflationary pressure could remain weak for some time.

EUR

The Euro inched 0.2% lower from the previous day, which was its highest since May 2016. The European Central Bank (ECB) will hold a policy meeting on Thursday, with participants seen as likely to adjust their language as they edge the ECB towards normalising policy. Such adjustments may include dropping a reference to the bank’s readiness to increase the size or duration of its asset-purchase programme before announcing in the autumn how and when it will start winding down its bond-buying.

The ECB, keen to retain flexibility in case the outlook sours, is set to keep its asset purchases open-ended rather than setting a potentially distant date on which bond-buying will stop, three sources familiar with the discussion said. ECB President Mario Draghi roiled markets last month when he opened the door to potential adjustments to the quantitative easing programme. “For the ECB, the market has shifted its expectations somewhat in recent weeks, especially following Draghi’s comments which were taken to be more hawkish,” said Mitul Kotecha, head of Asia macro strategy for Barclays in Singapore. “To this extent, there’s a lot already priced in, in terms of both the Euro and expectations of ECB policy,” he said. “The attention is on whether that is sustained in terms of what Draghi was saying, or whether we’ll see some reassessment.”

Data To Watch: 
12:30pm USD Housing Starts Change (Jun), Housing starts (MoM) (Jun), Building Permits Change (Jun) 
2:30pm USD EIA Crude Oil Stocks change (Jul 14)

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