Yesterday the Consumer Price Index for July showed UK inflation was slightly lower than expected at 2.6%. Analysts had expected inflation to rise slightly to 2.7% from June’s 2.6% and May’s 2.9%. The static growth was attributed to a fall in motor fuel, recreation, restaurants and hotel prices despite rising prices for clothing, household goods, gas and electricity.
The pound weakened across the board as investors felt the flat reading dampened chances of a rise in Interest Rates. Having said that, the news is good for the UK, with inflation appearing to have levelled off it gives the Bank of England greater flexibility over monetary policy instead of being forced to act before the economy is ready.
Most or all of the post referendum ‘sterling crash’ price rises may now have been factored in to the inflation figures meaning we could see inflation start to fall, allowing the BoE to observe growth and confidence before unduly crippling businesses in their time of need whilst dealing with the effects of Brexit.
Many of the reports out there this morning will say low CPI is terrible for the pound, indeed the pound touched lows of 1.2849 against the US dollar and 1.0952 against the euro. However with real wages falling it will come as a welcome surprise to many, it will help the economy grow and that will create a stronger pound than one lifted by artificial hopes of a rise in interest rates.
If the employment data out this morning continues the upbeat results it has done recently, the pound should take back some of the recent losses.
In the US a variety of data releases were generally positive. Advance Retail Sales beat the 0.3% estimate, coming in at 0.6% after last month’s 0.3% showing the largest gain in 7 months boosted by a rise in purchases of motor vehicles and discretionary spending. Empire State Manufacturing figures showed factory activity rose to 25.2 in August from 9.8 in July, comfortably higher than the 10.0 estimate. It was only Import Prices when excluding Petroleum that failed to meet expectations.
The German Constitutional Court passed on a case against the European Central Bank, alleging that its quantitative easing program oversteps its mandate, to the European Court of Justice. The central bank's public sector purchase program is in question because it might violate the ban on monetary budget financing. Germany's court said there were reasons to believe a violation took place. If this story gains traction, the ramifications for the euro could be huge.
With the upbeat US data and a lack of European data, EURUSD ticked down to a 5 day low of 1.1690.
This evening sees the release of the minutes from the FOMC’s recent policy setting meeting, details on an unwinding of the Fed's balance sheet or a continuously hawkish tone could give the US dollar another boost.
Australian wages growth remained at record lows in the second quarter, adding to concerns around rising strain on household budgets, which could put a brake on the economy. Wages grew 0.5% in the second quarter from the first, in line with economists' expectations. Meanwhile, consumers are facing sharp rises in utility costs, damping confidence and causing people to dip into savings to offset the flat income growth. GBPAUD remained stable at around 1.6435.