Currency Note

UK inflation unexpectedly drops to 2.6% and sterling weakens

By Paul Redmond July 19th, 2017

UK inflation holds

The big news yesterday was that the UK inflation rate fell to 2.6% in June from 2.9% in May. While this is still well above the Bank of England’s 2% target, it was the biggest decline in inflation since February 2015 and a surprise to the markets. The drop was attributed to several factors, including a fall in fuel prices and a 0.1% drop in the cost of recreation.

However, a report published by the Office for National Statistics showed that just about everything is more expensive than it was a year ago. While the drop in inflation can be viewed as some good news, it still outpaces wage growth, so the British public will continue to feel the pinch.

The markets had priced in no change in the rate of inflation and, as a result, the pound dropped a cent against the US dollar and the euro following the data release. Chances of a UK interest rate hike in the near future have decreased quite significantly. Having said that, surprising things appear to be happening all the time of late, so nothing can be ruled out.

We published our latest Forbes article yesterday, which trained its eye on the strengthening pound last Friday, events over the weekend, and what impact Brexit is having on currency movements.

Speaking of Brexit, two of our currency risk management experts will be delivering a webinar on 26 July at 11am.

GBP: inflation drop stalls sterling’s momentum

Sterling fell across the board as Britain’s inflation numbers hit the wires. Inflation fell and posted its first decline since October 2016 as the headline figure fell from 2.9% to 2.6%. What’s more, the core inflation reading (which excludes volatile energy, food, alcohol and tobacco) also showed a decline.

The net effect was sterling weakness as the market lowered its expectation of an imminent rate hike. If inflation had come out as expected (or greater) there would be continued pressure on members of the BoE Monetary Policy Committee to take action against escalating inflation.

The next few weeks and months represent a difficult tightrope to walk, where controlling inflation whilst keeping monetary policy in a place so growth can continue are chief considerations.

It is a quiet day with regard to economic data but newswires surrounding Brexit and other political news could trigger some currency movement.

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EUR: the euro resumes its march

The single currency made gains against both sterling and the US dollar yesterday, though this was more down to their respective weaknesses rather than euro strength. The euro gained ground against the pound following the release of UK inflation numbers, while the political events in the US weakened the dollar.

Yet again the Trump administration failed to get their health care bill through the Senate. Question marks have now resurfaced regarding whether the major infrastructure projects and growth projections promised during Trump’s election campaign are likely to become a reality.

With the eurozone being far more stable than the UK and US the single currency continues to profit. It is difficult to see this changing anytime soon.

USD: failure to get health care bill through Senate weakens weighs on dollar

Monday night’s news surrounding the US health care bill – where two Republican Senators voted against – and its failure to get through the Senate weakened the dollar. Donald Trump’s repeated failure to repeal Obamacare has been dubbed a ‘monumental failure’.

This certainly hasn’t done him – or the dollar – any favours and, again, casts doubt on the President’s future and the projects he promised during the election campaign.

The day ahead looks fairly quiet but political changes are likely to drive the dollar market once more. Markets will be especially interested in any indicators towards changes in monetary policy.

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