Is the Pop in the Pound Yet Another Fakeout?

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Market Drivers Aug 18, 2015

UK CPI is a bit hotter
Comm dollars drop in CNY equity drops
Nikkei -0.33% Europe -0.32%
Oil $4.50/bbl
Gold $1117/oz.

Europe and Asia:
AUD RBA Minutes – reaffirm neutral stance
UK CPI 1.2% vs. 0.8%

North America:
USD Housing Permits 08:30

NZD Dairy Auction 08:30

UK CPI printed slightly better than expected sending cable through the 1.5650 level in morning London trade as it markets speculated that UK disinflation may have troughed. UK CPI printed at 0.1% on a year over year basis as the core reading rose to 1.2% from 0.8% prior. This is still a far cry from the 2% BoE target level and suggests that lower oil prices continue to dampen any price pressures in the system.

The price of UK goods and services as measured by the PPI data continued to decline with core reading that excludes the volatile food and energy sector declining -4.9% from -4.7% the month prior. The sharp decline in oil prices which today traded back to the $41/bbl level indicates that price pressures in UK economy are likely to be nonexistent for the foreseeable future.

Although the BoE has made countless statements that markets should “look past” the current data as they expect inflation to revive, the current data offers little evidence for such a thesis. Core inflation has hovered below the 1.0% mark for all of this year and this months pop to 1.2% is the first break of that level. Its difficult to imagine that inflation data will heat up materially anytime soon, given the slowdown in China and the multi year lows in energy prices.

The market may therefore be getting ahead of itself as BoE is not likely to move on rates until 2016 and even then will do so only if the UK economy continues to operate at a steady pace. Cable has been trapped in a 1.5400-1.5600 range for the better part of the past 8 weeks and today’s data may push the pair through the 1,5700 level as longs hunt for stops, but we doubt that the unit will rise much higher than that over the near term horizon.

In North America today the calendar remains quiet with only Building Permits data on the docket and the low, slow level of trade that has characterized this summer doldrums may continue for yet another day. With little fresh news on the wires and many participants away from their desks, the markets may be content range trade until tomorrow’s FOMC minutes.

Boris Schlossberg
Managing Director

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