UK INFLATION CROSSES INTO DANGEROUS NEGATIVE TERRITORY
Inflation results from the the UK yesterday mean that Bank of England (BOE) Governor, Mark Carney, will have to write a letter to the Chancellor of the Exchequer explaining why inflation has fallen into negative territory. The actual release showed us that UK inflation fell to -0.1% for the month of September, whilst year on year (YOY) inflation fell further from the BOE target of 2%. This puts increasing pressure on the Governor who has been hawkish when speaking about interest rates in recent months.
On currency performance, zero inflation or in fact potential deflation pushes back any chance of a rate hike.This view is shared by new Monetary Policy Committee (MPC) member Vlieghe who stated that he would want to see an increase in inflation before he would consider voting for any such hike.
The Pound did have a difficult day as a result, which probably will not come as much of a surprise to our readers. Sterling lost almost a full 1% versus the Dollar and almost 0.75% versus the Euro.
Today, we have a host of releases concerning the UK Jobs market and this is likely to be the main driver for any GBP/USD price action. Analysts are calling for a potential push for 1.54 if the data published is positive. There are reasons to be optimistic as average earnings numbers in recent months have been on the stronger side. Conversely, should this be a negative turning point we can expect Sterling to suffer further losses and some banks seem to be feeling that weaker data will provide more profit potential for the speculative side of the market – watch closely and with an air of caution.
Focus in the States today will be on the advance retail sales figure out later. After non-farm payrolls, this data is viewed as the second most important economic number and the markets will want to see an increase if the Fed are to continue to consider a rate hike. This is all the more important as the figure determines domestic consumption, which must remain strong, as the already weak exports for the US will only be hurt further by an appreciating Dollar in light of a rate rise.
The consensus is that there will be another 0.2% expansion in the US economy, coupled with Janet Yellen’s optimism on the US economy, we may start to see a more hawkish view from US central bankers. On the flip side, a number below expectations is likely to prompt the Federal Open Market Committee to stand firm and continue to “wait and see” till end of 2015.
Yesterday’s German ZEW index came in below expectations for the seventh consecutive month. It dropped significantly to 1.9 from 12.1, with much of the confidence dented heavily by the VW scandal. The Euro however still gained against Dollar and Sterling yesterday. Those gains may retrace today, especially against the Dollar as EUR/USD will be susceptible to the Stateside retail sales figure. Draghi’s ability to weaken the Euro may be coming into question, as we have seen a 1.6% increase against the Dollar since September. His previous comments on considering increasing the QE programme are not having the desired effect of weakening the currency.