Headlines
UK CPI falls to 0% –
BoE rate hike bets on hold.
British labour data on tap –
Wage growth tipped to rise to 2.5%.
Eurozone inflation due –
ECB liable to loosen regardless of result.
GBP/USD sinks –
Despite soft American data.
Sterling
Sterling lost ground against most of the majors yesterday as traders reacted to the latest dip in UK inflation. The Office for National Statistics (ONS) reported that price pressures receded from 0.1% to 0.0% during August as the impact of falling oil prices continued to drive down the price of petrol at the pumps. A fierce price war between supermarket chains and tepid clothing prices also contributed to the fall in CPI. The consumer price index has now remained between 0%-0.1% for seven consecutive months, which appears to give the Bank of England little motivation to begin its hiking cycle anytime soon.
Today we have UK unemployment data to look forward to. The jobless rate is tipped to remain at 5.6% and wage growth is set to increase from 2.4% to 2.5% – both sturdy numbers but probably not sturdy enough to persuade officials on Threadneedle Street to alter their plans for monetary policy.
Euro
The Pound to Euro exchange rate slid by around half a cent yesterday as markets adjusted their BoE rate hike bets following the latest drop in UK consumer prices. The Euro, however, was boosted by data showing that employment rose by 0.3% in the second quarter, which appeared to outweigh a larger-than-anticipated plunge in German investor confidence from 25.0 to 12.1.
Today’s Eurozone data is anticipated to show that price pressures remained weak, but above those in Britain, at 0.2% last month. European Central Bank President Mario Draghi recently hinted that the bank could unleash a further round of quantitative easing measures to combat the crisis in China and subsequently markets are unlikely to be moved by the Euro inflation data, so long as it doesn’t print massively higher or lower than the estimates.
US Dollar
Sterling plunged below technical resistance against the US Dollar yesterday in reaction to the downbeat UK inflation figures.
Federal Reserve rate hike bets were damaged following US data during the afternoon but not even this was enough to lift GBP/USD. The afternoon’s American data showed that retail sales slowed from 0.7% to 0.2%, that business confidence cooled from 0.7% to 0.1% and that the New York Fed Empire manufacturing index remained in negative territory at -14.67. It was also reported that weak demand for automobiles sent industrial production down by -0.4% and manufacturing production numbers down by -0.5%.
Today’s data is expected to show that consumer prices remained soft at 0.2% in August, which could drive ‘Cable’ higher but not if technical resistance proves too great for Sterling.
Canadian Dollar
The Sterling to Canadian Dollar exchange rate declined by over a cent yesterday due to concerns that Britain could be sliding into a period of deflation. These concerns were largely unfounded because even if UK CPI does fall back below zero it is very unlikely that consumers will stop filling their fridges with food or petrol tanks with fuel in the hope of achieving lower prices at a future date. In short Britain is at risk of entering a period of disinflation, not a potentially catastrophic period of deflation.
Australian Dollar
The Pound depreciated by around -60 pips against the Australian Dollar yesterday as economic sentiment towards Sterling soured on the back of the latest soft inflation result. Over in Australia officials at the nation’s central bank gave a mildly positive statement in which it was noted that the slowdown in China was not currently deemed serious enough to alter the monetary policy output of the Reserve Bank of Australia.
New Zealand Dollar
The Pound lost out on around -200 pips against the New Zealand Dollar yesterday as domestic CPI data weighed on Sterling. The ‘Kiwi’ benefitted from a five-year high 16.5% rise in dairy prices at the latest Fonterra Global Dairy Trade auction and the Antipodean currency could register further gains this evening if GDP data shows an acceleration from 0.2% to 0.6% in Q2, as expected.
Data Released Today
09:30 GBP ILO Unemployment Rate (3M) (JUL) Medium 5.6%
09:30 GBP Average Weekly Earnings (3M/YoY) (JUL) Medium 2.5%
10:00 EUR Euro-Zone Consumer Price Index (YoY) (AUG F) Medium 0.2%
13:30 USD Consumer Price Index (YoY) (AUG) High 0.2%
23:45 NZD Gross Domestic Product (QoQ) (2Q) Medium 0.6%