Lower UK Inflation Weighs on the Pound

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Market Drivers for September 17th, 2013
RBA minutes shows a more dovish stance
UK Inflation lower sending pound to 5900
Nikkei -.65% Europe -0.50%
Oil $106/bbl
Gold $1319/oz.

Europe and Asia:
EUR CA 16.9B vs. 18.3B
EUR ZEW 49.6 vs. 45.3
GBP CPI 2.7% vs. 2.8%

North America:
USD CPI 8:30
USD NAHB 10:00

UK inflation turned tame in August sending cable a bit lower in morning London trade as BOE faced no price pressures to change its dovish stance for now. UK consumer prices continued their slow but steady decline coming in at 2.7% versus 2.8% the month prior, but it was the core reading and the PPI input numbers that showed the true trend in pricing. PPI input printed at -0.2% versus 0.3% eyed while core CPI reading matched last month’s 2.0% rate.

After a protracted bout of persistently high inflation the UK economy appears to have finally obtained some control over the pricing pressures as the core reading has remained at 2.0% for 3 out the past 5 months. Headline numbers meanwhile have hovered at 2.5% to 2.7% for most of this year after peaking at 5.2% in 2011.

The decline in prices was a disappointment for cable bulls as it offers ample scope for the BOE to maintain its highly accommodative bias despite clear improvements in UK economic growth. The central bank has pursued an aggressive forward guidance policy that is likely to keep UK rates low for the foreseeable future. With inflation data muted the BOE has no reason to adjust its policy for now.

Cable drifted towards the 1.5900 level in reaction to the news and may see some further declines as the day progresses, but the primary focus of the market will turn to the FOMC tomorrow and the pair could still make a run towards 1.6000 level if the Fed does not signal a taper of QE.

Elsewhere, the Aussie also came under some pressure in early Asian trade after the RBA minutes revealed a slightly more dovish than thought bias. The RBA noted that “Members agreed that the Bank should again neither close off the possibility of reducing rates further nor signal an imminent intention to reduce them.” This was still interpreted by some market players as a dovish rather neutral stance and Aussie was pushed below 9300 in the aftermath of the report. But as the night progressed the pair inched its way back and was trading at 9935 in mid morning European session.

In Europe the ZEW survey printed much better than forecast at 49.6 versus 45.3. This was the best reading since March driven primarily by good GDP data. However, the most recent data from the region has missed its mark and may signal that the nascent recovery is facing some headwinds. EUR/USD rebounded to hit a high of 1.3370 but the pair stalled at those levels and will likely wait until US session for further directional clues.

With FOMC release due tomorrow, trade in North America today is likely to be constrained as markets gear up for the main event risk of the month. Recent US economic data has been soft and today’s NAHB index may be no exception as higher rates could have slowed the demand for housing. With dollar still on the back foot that could push EUR/USD towards 1.3400 as the day proceeds.

Boris Schlossberg
Managing Director

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