After a relatively quiet start to the week in which sterling continued its recent rally against the US dollar, yesterday was rather hectic. The morning began with the news that UK inflation jumped to 2.9% in August from 2.6% in July. Economists had expected the figure to rise to 2.8% and the news pushed sterling higher as expectations of a tightening of monetary policy by the Bank of England increased.
Sterling continued to strengthen against the US dollar and reached a one-year high, clawing back 50% of the losses following the Brexit vote in the process. However, it is still worth 10% less than what it was in June 2016. In addition, the pound surged to a six-week high against the euro. All in all, a pretty good day for sterling, although with wages still only currently rising by 2.1%, the British public will still be feeling the pinch.
With no key economic data releases in Europe, attention for the rest of the week will be on the US PPI data due later today, inflationary CPI data on Thursday and core retail sales on Friday. In the UK, the focus will be on the Bank of England’s meeting tomorrow, where BoE Governor Mark Carney could hint at future monetary policy. If he does, we can expect some further strengthening in the pound and it will also be interesting to see how the Monetary Policy Committee vote with regards to an interest rate hike, especially given the high inflation reading.
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GBP: UK inflation jumps to 2.9% in August
Following a good end to last week for sterling, the run continued into Monday and Tuesday. Inflation figures released yesterday morning confirmed it had jumped to 2.9% in August from 2.6% in July. The pound rallied in response as speculation of a tightening of monetary policy seeped into the City.
Sterling reached a one-year high against the US dollar and a six-week high against the euro. It makes for a fascinating Thursday, when the BoE will convene to discuss future fiscal policies. While no interest rate hike is expected at this meeting, it will be interesting to see what tone Governor Carney takes and what the voting numbers are (the MPC voted 6-2 last time). It’s worth bearing in mind that inflation is still outpacing wages – which are currently rising by 2.1% – so the British public is still experiencing a cost of living strain.
The chart below shows movements between GBP and USD from the day before the EU referendum result to today. While the pound has made some significant gains against the dollar in recent times, it is still worth 10% less than it was in June 2016.
EUR: quiet day for the eurozone as the single currency slides
There are no major economic data releases from the eurozone this week so attention has understandably turned to the UK and US. The euro slid against sterling following the release of UK inflation figures which increased expectations of a faster-than-previously-expected interest rate hike.
At 2.9%, UK inflation is almost a whole percentage point over the BoE’s 2% target and it really does beg the question how high this figure needs to creep before Governor Carney and his colleagues feel obliged to do something about it.
Given that the meeting and decision doesn’t take place until tomorrow, it is entirely possible that we could see some further weakening of the euro against the pound throughout the course of the day. It is Thursday that will provide a fuller picture of the near future.
USD: busy rest of the week for the US dollar
Yesterday the dollar fell to its lowest mark against sterling for a year as UK inflation figures were released. Expectations of an interest rate increase have been bolstered, even if it still seems unlikely it will happen this time around. However, while the speculation continues we could see some further weakening.
It’s a busy rest of the week for the US in terms of economic data, with the release of the US PPI data later today. Tomorrow see the release of inflationary CPI data and core retail sales on Friday.
If these figures prove positive then we could see some sentiment around an interest rate rise by the Federal Reserve come to the fore; this would likely see the dollar strengthen as it goes head-to-head against sterling.
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