Pound plummets against major currencies on United Kingdom inflation data

EURUSDAug13
Morgan Stanley estimates that the euro will get similar to the pound in 2018
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16 August, 2017

Smith said the latest inflation data would continue to test the patience of Bank of England hawks.

Lower petrol prices in July were offset by higher costs for food, clothing and household goods, it said.

Yesterday's United Kingdom consumer price index data disappointed markets, after showing price growth hold steady on the year for both the overall and core variants.

'While inflation is expected to edge up further in coming months, there's little sign of pay growth accelerating meaningfully'.

The pound saw more drastic falls against the dollar, trading 0.76 per cent down on Tuesday at $1.2863.

It was also exchanging 0.35% lower versus the euro at €1.0966, accompanied by declines of 0.72%, 0.48% and 0.10% versus the Swiss franc, Canadian dollar and Japanese yen respectively.

'CPI remains well above the Bank of England's 2% target and we expect it to remain elevated throughout the third and fourth quarters, ' he said. He also solidified expectations that the Federal Reserve will start drawing down its balance sheet at the September Fed meeting in an effort to undo some of the stimulus that the U.S. economy relied on in recovery from the Global Financial Crisis. Michel Barnier will be marking the work and we can expect him to get his red pen out.

The GBP USD exchange rate could come under greater pressure if this afternoon's advance retail sales figure demonstrates a rebound on the month.

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'Markets continue to focus on current low inflation rates, but with the labour market tightening and the growth story looking ok the prevailing view within the Fed is likely to remain that low inflation is merely "transient".

The USD was also helped by comments from New York Fed President William Dudley who said that he would "be in favour of doing another rate hike later this year" if the economy holds up.

This morning's United Kingdom data will give a strong indication of how well households will be able to continue coping with the above-target level of inflation. The latest data shows that total weekly average earnings growth was 1.8% in the three months to May, while regular earnings growth was 2.0%.

A survey released on Sunday showed British employers expected to raise pay only minimally over the next 12 months despite hiring more staff, suggesting wage growth will remain a problem for consumer spending.

The US Dollar may ease back on its gains as the session progresses due to the fact that minutes from the 26th July Federal Open Market Committee (FOMC) meeting are scheduled for publication after the European session has closed today.

United Kingdom inflation figures out today of 2.6 per cent for July eases pressure on the Bank of England, but squeezed consumers can expect to see price rises beyond 2017.

It feels like inflation is the be all and end all of United Kingdom focused macroeconomics and certainly given the influence of sterling upon price levels the past year has seen a huge increase in focus on CPI.


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