Headlines
Pound surges on rising CPI –
Inflation rises to 0.1%, core prices up 1.2%.
GBP/EUR rallies 120 pips –
On BoE rate hike optimism.
GBP/USD hits 50-day high –
Pound could rally if Fed dampens Sep rate hike expectations this evening.
NZD rallies in afternoon –
On improved dairy auction results.
Sterling
The Pound jumped to life versus the majors yesterday morning when data showed that the headline consumer price index rose unexpectedly to 0.1% in July. The slightly stronger-than-anticipated result was mainly driven by fluctuations in clothing and shoe sales but air fares and rents also contributed.
Perhaps more pertinently, where demand for Sterling was concerned, the core UK CPI figure surged from 0.8% to 1.2%, which, paired with decent wage growth, suggests that the Bank of England will opt to begin its tightening cycle in the first quarter of next year. The core inflation print, which strips out the volatile effects of fluctuations in food and fuel, is seen as a more reliable gauge of price pressures and as such the surprisingly strong uptick bodes well for the Pound.
Euro
Sterling appreciated by around 120 pips against the Euro yesterday as markets reacted positively to the latest UK consumer prices report.
The news helped drive the Pound to Euro exchange rate to its highest level for ten days as the prospect of higher rates in the UK came back into focus. This was especially beneficial for Sterling because the European Central Bank jintends to continue purchasing billions of Euros worth of assets each month for at least another year.
Across the channel in the currency bloc there were no real market moving announcements. The only news of note was confirmation that a few Eurozone governments (Austria, Slovenia, Spain) voted to approve the latest bailout package. However, markets were not overly concerned before the votes and subsequently the relief following the votes didn’t translate into enhanced demand for the single currency.
US Dollar
Sterling rose to a 50-day high against the US Dollar yesterday as the latest UK CPI data persuaded markets to bring in the gap between their BoE and Federal Reserve rate hike expectations.
‘Cable’ rose through significant technical resistance following the British inflation report but the Pound was unable to settle above this letter and gave back some of its initial 150-pip gains during the New York session. There is potential for GBP/USD to jump back above resistance this evening if policymakers at the Fed opt to strike a dovish tone in the wake of last week’s unconventional currency interventions in China.
Data in the States showed that applications for new building permits collapsed during July, with a shocking 16.3% monthly fall. New housing starts slowed from 12.3% to 0.2%.
Canadian Dollar
The Pound came even closer to striking a fresh six-and-a-half-year high against the Canadian Dollar yesterday as the unexpected surge in core UK consumer prices was interpreted by many as a sign that interest rates will begin to rise in Britain at the beginning of 2016. Profit-taking took Sterling lower during the afternoon but the door remains open to further GBP/CAD gains if British data continues to pave the way to an economic climate suitable for tighter monetary policy.
Australian Dollar
Sterling appreciated by over two cents against the Australian Dollar yesterday on the back of the sturdy UK inflation report. The ‘Aussie’ had initially shown a proclivity to strengthen as Antipodean investors reacted to a relatively upbeat minutes report from the Reserve Bank of Australia, which indicated that policymakers were happy to leave interest rates on hold for now. However, the RBA minutes were recorded before the People’s Bank of China (PBoC) took the surprise decision to weaken the Chinese Yuan by around 5% last week and it is possible that RBA officials may strike a slightly more dovish tone at next month’s meeting to reflect the fear that Chinese demand for Australian exports might decline over the next few months.
New Zealand Dollar
GBP/NZD increased by around two cents yesterday morning when news of a rise in UK consumer prices hit newswires. However, demand for the New Zealand Dollar improved during the afternoon in response to a positive result at the latest Fonterra dairy auction.
The ‘Kiwi’ Dollar clawed back around 100 pips when the auction results were published, showing that New Zealand’s largest dairy producer had increased its payout forecast by 14.8%, rebounding strongly from a 9.3% decrease at the previous auction. The periodic dairy auction results have a strong bearing on demand for the ‘Kiwi’ because dairy products are the nation’s most lucrative export.
Data Released Today
13:30 USD Consumer Price Index (YoY) (JUL) High 0.2%
13:30 USD Real Avg Weekly Earnings (YoY) (JUL) Medium 1.8%
19:00 USD U.S. Fed Releases Minutes from July 28-29 FOMC Meeting High