The Pound has fallen sharply today following weak UK inflation data. The headline Consumer Price Index (CPI) reading was -0.1% year on year in September; much worse than market expectations of +0.2%.
The Pound fell more than 1% against the US Dollar and Euro hitting a low of 1.5201 and 1.3347 before recovering approx ¼ cent towards the end of the day.
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The Pound has strengthened this morning following the release of stronger than expected UK inflation data with Core Consumer Prices rising at an annual pace of 1.2% adding weight to the argument that the Bank of England should consider increasing UK interest rates which have stood at their historic low of 0.50% for more than six years.
This follows recent comments from Bank of England Monetary Policy Committee member Kristin Forbes who argued that “Waiting too long would risk undermining the recovery – especially if interest rates then need to be increased faster than the gradual path which we expect” and comments from MPC member David Miles who said there are arguments for “stating the journey now” towards a rate hike.
An increase in interest rates makes the associated currency more attractive as global investors seek yield in a global economy with historically low interest rates. Both the Federal Reserve in the US and the Bank of England in the UK are now expected to increase rates either late in 2015 or in 2016. Most expectations are for the Federal Reserve to increase rates before the Bank of England with the Bank of England more likely to raise rates in 2016.
The Pound increased to 1.5670 against the US Dollar (from 1.5598 before the inflation data) and increased to 1.4154 against the Euro (from 1.4085 before the inflation data).
The Pound has fallen this morning, most notably against the US Dollar, as UK Consumer Price Index data confirms UK inflation slowed to the least in five years last month at 1.2%, adding pressure on the Bank of England to keep interest rates at record lows for longer. Lower UK interest rates make the Pound less attractive to international investors seeking higher yield. The perception earlier this year that the Bank of England may raise rates in early 2015 had helped the Pound to appreciate to a high of 1.7191 in July against the US Dollar and 1.2875 against the Euro as recently as 1st October. As the market increasingly begins to price out imminent Bank of England rate rises the Pound trades today as low as 1.5948 against the US Dollar and as low as 1.2570 against the Euro.
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As expected this morning UK inflation figures fell, even lower than what the markets had been expecting. UK Consumer Price Index fell to 2.4%, down from 2.8% the previous month and below market expectations of 2.6%. UK Core Consumer price index was also down 40 basis points to 2.0%, recording a figure below market expectations of 2.3%. UK Producer Price Index and UK PPI Core Output were also down at 1.1% and 0.8% respectively.
In what was a rather busy morning in terms of UK data releases, nearly every piece of economic data released concerning the UK economy was negative. As would be expected Sterling fell right across the board following these inflation figures’ release. GBP/EUR fell to a daily low of 1.1777 however remained within the approximate 1.5 cent range that the pair has been trading within for the last month. Similarly Cable fell to a daily low of 1.5163, continuing the pairs decline since early May with a further test of the 1.5157 level now likely and should this break the next area of substantial support being found at 1.5127.
Much earlier this morning we saw the Japanese Yen return to its depreciating ways following Japanese Economy Minister Akira Amari’s much more coy response regarding the potential end to the Yen’s slide against the Dollar. This comes after the Yen strengthened yesterday following the economy minister’s comment that suggested further weakening of the Yen may adversely impact upon Japanese people. The bank of Japan’s record monetary stimulus program would now appear to be having the desired effect that Japanese finance ministers had initially hoped it would. Figures released in Tokyo last week showed that Japanese GDP rose to an annualized 3.5%, suggesting that the Bank of Japan’s efforts to end a decade of inflation are actually having a positive impact on the economy. This increase in money supply has had the inevitable, yet “unintentional”, effect of depreciating the Yen, which rose to above USD/JPY 100.00 two weeks ago for the first time in over four years, and has consequently lead to a boost in exports. Data released so far suggests that BoJ Governor Haruhik Kuroda may actually be able to reach his ambitious target of reaching 2.0% inflation in just two years. USD/JPY is currently trading at 102.68 and speculation will now grow as to whether the pair will reach 105.00.
With very little data due out this afternoon, trader’s attention is likely to turn to tomorrow where we will see a number of key releases. In the early hours of tomorrow morning the Bank of Japan is set to make their interest rate decision and monetary policy statement, potentially giving the market an indication of how long their extremely loose monetary policy will continue. Moving back westwards, later tomorrow morning UK BoE minutes will be released, followed by the US FOMC minutes tomorrow evening. As Sir Mervyn King comes to the end of his tenure as governor of the BoE, it is unlikely that we will see any drastic information released in the BoE minutes, however the market will be keen to see if the FOMC minutes or Fed Governor Ben Bernanke’s press conference give any indication as to when a reduction in the Federal Reserve’s bond buying program will be brought to an end.
Markets are relatively flat this morning as economic data coming out of Europe has thrown up no real surprises. The German Consumer Price Index for December was bang on expectations at 2.1%, as was the UK CPI at 2.7%. There were only a few marginal variations today as the UK Producer Price Index – Output fell short of market expectations recording a figure of 2.2%, whilst UK Retail Sales improved by 0.1% to 3.1% in December.
The data released so far today has caused very little movement in Sterling or the Euro. The pair is currently trading at 1.2030, having found support at 1.2010 late last night following a dismal day for the Pound. GBP/EUR broke below a key level of support at 1.2170 on Friday and continued its slide yesterday. Should the psychological level of 1.20 break, the next area of support for the pair is 1.1946. A break below this would be a strong indication that we could return to sub 1.17 levels, a level not seen since December 2011.
Cable is currently trading at 1.6067. This price level is a key trading area and is currently sitting on a six month upward trend line. The pair has been oscillating between Fibonacci levels at 1.6120 and 1.6003 for the past ten days with only minor breaks either side. A break below 1.6010 would have to break the six the month upward trend line and would indicate a potentially significant drop off and it is likely the four month low of 1.5825 would be tested once again.
Last night European Finance Ministers prolonged the inevitable yet again and ensured that unnecessary uncertainty would remain within the markets for at least a further week. Greece could well go bankrupt this week; however this is not going to happen. European leaders won’t allow it to happen, and it is this very reason why markets are becoming frustrated. Frustrated with European finance ministers and their inability to reach a compromise over exactly how Greece’s ever increasing black hole should be plugged.
Ministers did however manage to push back to 2022 the goal of getting Greece’s debt down to a sustainable level, although there was still disagreement amongst ministers over this issue, most notably from IMF Managing Director Christine Lagarde. This miniscule achievement has done little to help reassure the markets this morning as the Euro is down against Sterling and has hit a two month low against the Dollar. Such movements coincided timely with the release of EU and German confidence surveys, for both of which the results were appropriately down.
The Pound’s strength this morning is likely down to the positive Consumer and Producer price index figures released at 9:30. The UK Consumer Price index (YoY) figure hit 2.7%, surpassing market expectations of 2.3%, whilst the UK Producer Price Index – Output (YoY) remained flat at 2.5%. This led to a sharp spike in GBP/EUR as it hit 1.2546 and GBP/USD reached 1.5904 before leveling out. With little more economic data due out for the rest of the day other than the US Monthly Budget Statement at 19:00, the driving force behind any rate movements today will be the ever worsening situation in Greece.
The Pound continues to trade either side of 1.14 against the Euro and around 1.57 against the US Dollar following the release of this morning’s Bank of England minutes.
The minutes showed that the Monetary Policy Committee (MPC) voted unanimously in favour of increasing its current Quantitative Easing Asset Purchase Programme by a further £75bn to £275bn.
The minutes revealed that the MPC considered extending Quantitative Easing between £50bn-£100bn.
The Bank of England’s next monetary policy decision is due on the 10th November. Despite the latest inflation data hitting 5.2%, 3.2% over the Bank’s 2% target. The Bank remains committed to its view that inflation should have peaked and will begin to fall back rapidly in 2012.
The Pound has spiked higher this morning (17/05/11) following the release of higher than expected UK inflation data. The Consumer Price Index was up month on month at 1.0% and up year on year at 4.5%, compared to 0.3% and 4.0% respectively last month. UK inflation remains stubbornly above the 2% target and the Bank of England has suggested it could reach 5% before falling back in 2012.
Continued high inflation readings increase the probability of interest rate hikes from the Bank of England. Typically, as a central bank increases interest rates their currency will appreciate as global investors seek a higher yielding currency.
The Pound is up on the interbank market against the US Dollar at 1.62, against the Euro the Pound trades at 1.14. Please note the rate you are able to achieve will depend on the amount of currency being purchased. Please do not hesitate to contact the dealing team on +44 (0) 1695 581 669 for a live quote.