Market News & Insights
14 February 2018

Does Inflation Dominate?

As we’ve highlighted several times in this piece over the last few weeks, Brexit news will be the main driver of the larger directional moves for sterling. Yesterday was another case in point. First up we had key UK inflation data which caught the market by surprise with a reversal in the recent slide as inflation popped back up to 3% for the headline reading. The core reading, which excludes volatile food and energy prices, also jumped back up to 2.7% in January. This puts another potential rate hike by the Bank of England firmly back in the spotlight. In a recent survey of leading economists, 50% see a rate hike in May which rises to over 70% by August. The jump in inflation comes on the back of last week’s hawkish assessment by the Bank of England. From a FX market perspective, naturally as would be expected, sterling reacted by moving higher. Versus the dollar it spiked to 1.3923 although that only represented a mere 0.40% move for the morning. Similarly too for EURGBP it reacted, with sterling strengthening initially as EURGBP hit a day low at .8857 (GBPEUR high of 1.1291) but again it was a muted reaction of only 0.45%. Previous levels are still in place with EURGBP at .8970 offering firm resistance ahead of .9000/.9030. Before that, again we have seen euro sellers above .8900 overnight and this morning too. No change for GBPUSD with 1.3765 still providing support while any material sellers will emerge towards 1.4000.

Normally the acceleration of the outlook for a central banks’ rate hikes would see an appreciation in the currency, this hasn’t been the case with sterling as the approximate range of .87-.90 for EURGBP has remained firmly in place since September of last year. It would appear Brexit developments are likely to be the driver of any breakout of this range. Although it must be noted too that the more hawkish outlook by the BoE and the increase in market expectations, has probably resulted in a negative tilt or bias for this range. For example, since EURGBP last hit .90 in mid-November, it has hit the bottom end of the range on at least four occasions. On the Brexit story, later today we have Boris Johnson speaking, the first of six speeches being made by PM May and senior cabinet figures to set out the British government’s road map for Brexit.

Inflation is set to ‘dominate’ again today or at least the economic calendar with the US equivalent scheduled for release at 1.30pm today. After last week’s equity market rout in response to fears over global central banks’ monetary policy plans, US consumer price data could give some clues on where markets are heading, with investors assessing the outlook for inflation and what it means for the trajectory of U.S. monetary policy, despite new Chairman Jerome Powell suggesting the Fed would forge ahead with gradual rate increases whilst keeping an eye on financial-system risks post the rout. Market consensus is predicting a falling inflation rate of 1.9% (from 2.1% in December). Any surprises to the upside could easily spook markets again over fears of the speed of these rate hikes.