Headlines
- UK inflation slides to 14-yr low – CPI plunges to 0.5%.
- ECB QE & Greek elections weigh on Euro – GBP/EUR up 0.8 cents.
- GBP/USD flat – Despite sharp drop in British inflation.
- New Zealand Dollar down on dairy concerns – Sterling rallies by over a cent.
Sterling
British inflation is currently running at its lowest level since Ken Livingstone was elected Mayor of London, the Tate Modern first opened its doors to the public and the FA Cup final was still being held at the old Wembley. The Office for National Statistics (ONS) announced yesterday that the UK consumer price index halved from 1.0% to 0.5% during December. The overawing downward impact came from fuel prices, which tumbled -22% in 2014 due to plunging oil prices. But supermarket price wars and falling gas and electricity bills also contributed to the lowest CPI reading since May 2000.
Politicians, Tory politicians in particular, were keen to brand the 14-year low CPI score as unequivocally good for the domestic economy. Indeed, the joint-lowest inflation rate on record means that real wages are actually rising and should act as a veritable tax cut by bolstering Britons’ spending power.
However, there is a slender possibility that falling fuel and electricity prices could start to infect other areas of the economy and push the United Kingdom towards a disinflationary climate similar to that which now exists in the Eurozone. It is also possible that soft price pressures could erode workers’ ability to demand higher wages from employers.
Overall, the ultra-low rate of inflation is liable to boost the British economy in the short-term, but if price pressures do not eventually start to grow it could impair the British recovery and prevent the Bank of England from raising interest rates. This would have a negative impact on Sterling.
Euro
Despite the surprisingly sharp drop in British inflation yesterday – traders had anticipated a smaller dip to 0.7% – the Pound managed to rally by around 0.8 cents against the Euro as technical trading patterns continued to signal bullishness in favour of Sterling.
With the threat of stimulus from the European Central Bank and uncertainty surrounding the Greek general elections at the end of the month weighing on the single currency, it looks likely that GBP/EUR will continue to trade close to six-year highs over the next few weeks.
US Dollar
The Pound to US Dollar exchange rate tumbled by over half a cent yesterday morning when the shockingly low UK CPI figures were announced. However, the core inflation score, which strips out the highly volatile food and energy sectors of the report, actually showed an increase from 1.2% to 1.3%, suggesting that the underlying picture for price pressures is nowhere near as bad as the headline readout portrays.
Bank of England Governor Mark Carney, who is now obliged to pen a letter to Chancellor George Osborne explaining why inflation is running at under half the bank’s 2.0% target, said that the risk of Britain becoming entrenched in deflation is very low, but intimated that the pace and scope of the bank’s hiking cycle over the next two years could be smaller due to the steep fall in inflationary pressures.
GBP/USD could gain a little bit of ground against the ‘Greenback’ this afternoon if US retail sales come in at -0.1% as expected.
The Sterling to Canadian Dollar exchange rate ended the London session at very similar levels to that which it opened. The Pound suffered a knee-jerk reaction to the 0.5% UK CPI print but the ‘Loonie’ was unable to hold onto its immediate gains because the ongoing rout in the crude oil market showed no sign of abating.
The Pound went on a rollercoaster ride against the Australian Dollar yesterday but ended trading at the day’s opening levels. GBP/AUD fell by as much as -0.8 cents during the morning but the pair recovered during the afternoon.
New Zealand Dollar
The Pound rallied by over a cent against the New Zealand Dollar yesterday as sliding dairy prices damaged sentiment towards the Antipodean currency. With milk purportedly cheaper than bottled water and farm costs around 36% higher than they were just eight years ago, New Zealand’s dominant dairy industry looks to be in the throes of a profitability crisis.
Data Released Today
10:00 EUR Euro-Zone Industrial Production w.d.a. (YoY) (NOV) -0.7%
13:30 USD Advance Retail Sales (DEC) -0.1%
15:00 USD Business Inventories (NOV) 0.2%