Headlines
• UK inflation remains below zero –
But core consumer prices rise.
• GBP/EUR rises to new three-month high –
Stimulus more likely following Paris attacks.
• Sterling up slightly vs. US Dollar –
US inflation impresses, core CPI close to 2%.
• Fed minutes report on tap –
Hawkish statement could boost ‘Greenback’.
Sterling
Demand for the Pound increased yesterday even though consumer price data showed that inflation remained in negative territory at -0.1% in October. The strong Sterling exchange rate, plunging oil prices and fierce supermarket price wars kept the headline consumer price index down but the core figure, which strips out volatile food and fuel prices, rose unexpectedly from 1.0% to 1.1% and this bolstered the appeal of the Pound.
Analysts estimate that around 80% of the reasons that CPI has floundered between -0.1% to +0.1% since February this year are short-term factors such as the recent appreciation of Sterling and the collapse in commodity markets. Bullish traders expect inflation to return towards the 2.0% target rapidly next year when the impact of oil depreciation and Sterling appreciation wear off – CPI measures prices as compared to 12 months previously, meaning that oil prices will have to continue to plunge and Sterling will have to continue to strengthen across the board if these factors are to drive CPI lower in 2016.
Euro
The Pound to Euro exchange rate rallied by a further 70 pips yesterday to strike a fresh three-month high. Sterling was boosted by the slightly better-than-expected UK core consumer price index score of 1.1% whilst the single currency was hurt by speculation of further stimulus from the European Central Bank.
French Prime Minister Maneul Valls announced yesterday that France will not be sticking to its EU budget target of bringing its deficit down to 3% of GDP by 2017 and will instead be spending more on defence in the wake of last week’s devastating terrorist attacks. The European Commission backed France’s new spending plan, stating that ‘the security of citizens in France and Europe is the priority’ and as a result rallying defence shares took European stock markets higher.
The Euro weakened as investors continued to bet that policymakers at the ECB would be moved to implement further stimulus measures in order to prop-up the Eurozone economy in the aftermath of last week’s terrible attacks.
US Dollar
The Pound strengthened slightly against the US Dollar yesterday as a surprise uptick in core UK inflation gave rise to speculation that British price pressures could pickup in the New Year.
US inflation printed considerably stronger, with the headline index coming in at a better-than-anticipated 0.2% and the core CPI printing at 1.9%, but it was not enough to drive GBP/USD lower on this occasion.
A separate US report showed that industrial production contracted -0.2% for the second month on the trot in October but traders said the report was unlikely to perturb the Federal Reserve from raising rates in December because manufacturing output performed much better at 0.4%.
‘Cable’ has remained remarkably resilient so far this week but demand for the ‘Greenback’ could grow this evening if the Fed’s latest minutes report is seen to increase the probability of a rate hike next month.
Canadian Dollar
The Pound to Canadian Dollar exchange rate remained sturdy yesterday as falling commodity prices continued to weigh on the risk-correlated ‘Loonie’. Sterling stands to gain against the Canadian Dollar later this evening if markets view the Federal Reserve’s policy statement as a clear sign that recent improvements in the US labour market will lead to an increase in US rates in December. However, if the Fed minutes strike a more dovish tone then the ‘Loonie’ could rally on renewed risk appetite.
Australian Dollar
The Australian Dollar clawed back a little bit of ground against the Pound yesterday as traders interpreted the latest report from the Reserve Bank of Australia as a sign that the central bank expects domestic growth to improve in the New Year. The RBA noted that subdued inflation left scope for further rate cuts but argued that record low interest rates were boosting economic activity and that the weaker ‘Aussie’ Dollar was helping drive demand for Australian exports.
New Zealand Dollar
The Pound to New Zealand Dollar rallied by around 60 pips to reach a new 40-day high yesterday as demand for the ‘Kiwi’ was severely impacted by another dip in dairy prices. Dairy is New Zealand’s biggest export and subsequently the ‘Kiwi’ weakened when GlobalDairyTrade announced an average price cut of -7.9%.
Data Released Today
13:30 USD Housing Starts (MoM) (OCT) Medium -3.8%
19:00 USD Fed Releases Minutes of the Oct. 27-28 FOMC Meeting High