Headlines
UK inflation tumbles to more-than-25-year low
– Jan CPI prints at 0.3%.
GBP/EUR weakens on Greek debt deal hopes
– But concerns exist over how a deal would work.
GBP/USD flat
– Fed minutes on tap.
UK unemployment to remain at 6-yr low
– British wages to rise 1.7%.
Sterling
The Pound tumbled against most of the majors yesterday due to data showing that inflation slowed by more-than-expected in January, hitting the weakest level since records began. The latest CPI reading signalled that price pressures tumbled from 0.5% to a more-than-25-year low of 0.3% last month, driven by plunging oil prices and large-scale reductions at supermarkets.
However, despite the multi-decade low headline consumer price index, the core inflationary gauge showed that when volatile food and fuel prices are removed from the equation, British consumer prices are actually starting to bubble up. Core CPI rose from 1.2% to 1.3% in December, and then from 1.3% to 1.4% in January, corroborating comments from Bank of England Governor Mark Carney suggesting that inflation could overshoot the bank’s 2.0% target in two year’s time if interest rates are not raised.
Euro
Sterling lost out on around 90 pips against the Euro yesterday as markets reacted to the soft headline UK CPI figure.
The embattled single currency also garnered support in reaction to dark mutterings in Greece suggesting that the Hellenic nation could appease its European creditors by asking for a six-month extension to its current bailout programme. It is anticipated that the potential new deal will involve a number of Greek-imposed caveats so as not to give the impression that Syriza is backtracking on its pre-election pledge to bring about an end to EU-imposed austerity measures.
The rumour stoked demand for the Euro because it was seen to reduce the probability of an untimely Greek exit from the Eurozone. However, Greek Prime Minister Alexis Tsipras struck a defiant tone in parliament last night, making it difficult for analysts to understand how a new deal could be brokered. The radical leftist leader told MPs that Greece will not submit to ‘psychological blackmail’ and will not agree to a continuation of the ‘toxic’ austerity measures that were a precursor to the previous aid deal. Tsipras’ fighting talk ensures that the very real threat of a ‘Grexit’ still looms large over the single currency.
US Dollar
The Pound to US Dollar exchange rate stabilised just below its highest level in a month yesterday, suggesting that GBP/USD could be on track to appreciate further over the next few months.
The fact that Sterling managed to avoid any significant losses against the ‘Greenback’ on the day that inflation dipped to its lowest level on record bodes well for the Pound because it shows that speculative traders are less pessimistic about the Bank of England’s rate outlook than they were previous to Governor Mark Carney’s quarterly inflation report last week.
Later this morning UK data is anticipated to show that average earnings ticked higher at a rate of 1.7% in the three months to December and that unemployment remained at a six-year low of 5.8%, which should support early 2016 rate hike bets.
However, this evening’s Federal Reserve minutes report could bolster the appeal of the ‘Greenback’ if central bank officials show signs of hawkishness and a desire to start hiking rates early.
Canadian Dollar
The Canadian Dollar rallied by over a cent against the Pound yesterday due to a welcome rise in crude oil prices. The so-called ‘black gold’ rose to a 2015 high of $62 a barrel as falling rig counts in the US and threats to distribution in the Middle Eastern gave way to a rare spurt of bullishness in the oil market.
Libya has shut all major ports, almost completely halting oil exports, due to an escalation of military conflict in the country and the Kurdistani region of Iraq threatened to withhold oil exports if budgetary discussion in Baghdad failed to yield a positive outcome. These seemingly gloomy global developments boosted the value of crude because they were seen to help erode oversupply in the market.
Australian Dollar
The Pound to Australian Dollar exchange rate shed around 130 pips yesterday as investors continued to digest comments from Reserve Bank of Australia Governor Glen Stevens suggesting that rates will not be cut further over the next few months. However, some economic commentators pointed to the RBA’s historical tendency towards consecutive policy changes at the start of new cycles and argued that, despite Monday’s RBA statement, a further 25 basis point cut is likely to be announced during March.
New Zealand Dollar
Sterling depreciated by over a cent against the New Zealand Dollar yesterday thanks to an upbeat dairy auction, which saw the value of New Zealand’s largest export increase by 10%.
Data Released Today
GBP Average Weekly Earnings (3M/YoY) (DEC)
GBP ILO Unemployment Rate (3M) (DEC)
GBP Bank of England Minutes
USD Industrial Production (JAN)
USD U.S. Fed Releases Minutes from Jan. 27-28 FOMC Meeting