Yellen gave mixed messages in her report to Congress and data out of Europe were, on the whole, below expectations.
UK inflation highest since 2014 despite missing forecast
Sterling (GBP, pound) weakened from its six-week high against the euro (EUR) and also weakened slightly against the US dollar (USD).
It lost its overnight momentum as the headline inflation figure undershot analyst projections by 0.1%. Despite failing to record the forecasted figure, inflation at 1.8% is at its highest rate since 2014, which is in large part due to the increase in fuel prices and the weak pound (GBP). This fourth consecutive monthly rise in inflation takes the rate closer to the Bank of England (BoE) target of 2.0 percent. With the central bank expecting levels to climb to 2.7 percent, the main question mark will be around the likelihood of an interest rate rise. Since the referendum last year, economic data has been, on the whole, robust with the UK economy continuing to function in an industrious manner. However, since the turn of the year the UK appears to be showing the first signs of fatigue in terms of economic activity, despite reporting positive numbers. The key issue that the central bank needs to consider is not only the direction of growth but the pace of growth against an inflation environment. With so much still to be played out in terms of Article 50 and the reception the UK will receive once negotiations commence, the BoE will need to sit on their hands for an extended period whilst the situation becomes clearer in the coming months.
Labour data is due to be released today. As well as growth and inflation, the labour data will be a key economic reading for the BoE with regards to timing of a rate hike. Because we are starting to see a slight softening of data, this is one area that will be closely examined. The claimant count – the change in the number of people claiming unemployment benefits – is expected to increase from last month. If this does indeed occur and the softer trend in economic data continues while inflation pushes higher, analysts will start discussing the potential of a stagflation like environment. Stagflation will provide a predicament for the BoE, as it attempts decides whether to prioritise tackling inflation or stimulating economic growth. A difficult time to predict where to next for sterling exchange rates.
Weak German data undermines the euro
Yesterday was a busy day in terms of data in the Eurozone, with the headline figures suggesting sluggishness on the continent. German and European Gross Domestic Product (GDP) figures fell below expectations. Thankfully, the Italian GDP release provided a more upbeat outlook, beating expectations. All three ZEW Centre for European Economic Research surveys – two monitoring German economic sentiment and one measuring sentiment for the whole bloc – failed to fall in line with forecasts. This saw the euro (EUR) weaken in early morning trading against both the US dollar (USD) and the pound (GBP), before strengthening in the middle of the day, only to fall again before the close.
The European Trade Balance and Spanish consumer price data are due for release today. Although not headline grabbing news, a below forecast reading from both could combine with falling investor confidence in the Eurozone to trigger euro volatility.
Yellen gives mixed signals
The US dollar remained range bound yesterday but investors would have been surprised to see significant short range movement on the US dollar verses a basket of currencies while the Federal Reserve Chair Janet Yellen discussed future interest-rate hikes.
For the first time since Donald Trump became president and promised to boost U.S growth, Yellen took centre stage to present her semimanual report on monetary policy to Congress. To summarise, Yellen reiterated that falling behind on tackling inflation could cause harm to the US economy but with uncertainty on President Trumps fiscal policies the Federal Reserve had to be cautious about being too aggressive on interest rate hikes. Expectations are still that we could see a 0.25% increase in US interest rates next month.
Today we have Consumer Price Inflation, Retail Sales and Crude Oil data coming out for the US. Forecasts are not expecting any large differences in the data compared to the previous month. Yellen completes her semi-annual testimony later in the afternoon.
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