Yesterday at 09:30 the Office for National Statistics (ONS) announced that Consumer Price Inflation (CPI) spiked to 1.8% in January which is a monthly increase of 0.2% from December 2016's number of 1.6%, although this missed forecast of a 1.9%, as you will see from the business pages this morning, it is the fastest increase since 2014. One metric that showed a considerable 20% increase was the ‘Prices paid by factories’ jumped to 1.7% from a 1% forecast. While a weaker GBP was certainly a major catalyst, a strong USD and rising oil prices (priced in USD) compounded this.
GBPEUR had a choppy day’s trade, to say the least yesterday as we saw the GBP fall 0.74% almost instantly from 1.1810 to 1.1720 and then rally back up to breach 1.18 again. This came from below forecast but still a high since 2014 inflation data, the recovery in sterling was initially helped by the 10:00 release of dismal Euro zone data (German ZEW, Flash GDP and industrial production) and then the surprise ‘hawkish’ stance taken from a usually ‘dovish’ Yellen helped keep the EUR in check and we see the GBP/EUR start the day sitting over 1.1780.
GBPUSD started the day in the same pattern as GBPEUR yesterday without the rebound later in the day. The pound fell 0.82% from 1.2545 to 1.2443 off the inflation release and continued to trade sideways as the day progressed. Not only was the decline derived from Yellen’s comments, keeping a march hike on the table, but also from strong PPI/Core PPI data posting 0.6% and 0.4% from 0.3% and 0.2% forecast. At the point of writing this we see the GBPUSD at 1.2429 .
Rolls Royce, the world leader of luxury engines and vehicles have declared the biggest loss in U.K. corporate history of £4.6bn, as a result of the collapsing value of the pound and the resulting impact on their currency derivative products that then spiralled into a £4.4bn currency 'write down'. As the company generates a lot of its revenues in Dollars, while their cost-base is mostly in Sterling, this counter-intuitive write-down highlights the complicated nature of the company’s hedging policies, which has a £30bn currency hedging book and has been described in the past as a ‘hedge fund with an engine maker attached’.
Panmure Gordon’s chief economist, Stephen French has said that markets are still ‘unbalanced’ and growth is still driven by consumption, however he says the 15% drop in the value of the pound is starting to impact the UK’s balance of payments (exports – imports) which is improving and we are "starting to see net exports start to pick up some of the slack, you need to see more of that to get a more balanced growth,". "The flexibility of the currency over the last six months has been a real boost for the UK economy in a way that neighbours over in the Euro zone would be looking quite jealously at the flexibility the UK has in that regard,".
Today at 09:30 we have average earnings data, claimant count change and unemployment rate from the UK.
In the U.S. yesterday both PPI and Core PPI came in over forecast although this is not what the City is digesting this morning. I am of course talking about the speech from Janet Yellen to the Senate Banking Committee. The sound-bites and quotes that are being used are centralized around “the Fed will need to raise interest rates at an upcoming meeting and delaying rate increases could leave the central bank’s policy-making committee behind the curve." This of course, in no way guarantees a rate hike, but the quote of “At our upcoming meetings, the Committee will evaluate whether employment and inflation are continuing to evolve in line with these expectations, in which case a further adjustment of the federal funds rate would likely be appropriate.” Clearly means that a hike as soon as next month is being considered. The sentiment from yesterday is due to carry through to today.
A beleaguered-looking U.S. Press Secretary, Sean Spicer stood in the press office at the White House yesterday and answered questions regarding the resignation of Micheal Flynn, who until yesterday was the National Security Adviser to the United States. The resignation sets a record for the shortest tenancy in American history as Flynn stands down over allegations that he discussed US sanctions with a Russian envoy in December, before Trump became President
All Euro-zone data yesterday, with exception of German final CPI coming in on forecast at 0.6%, missed the mark yesterday. From 07:00 we saw the estimates missed, and this trend continued causing the EUR to steadily decline, Eurozone GDP missed the forecast of 0.5% quarterly increase and a 1.8% year-on-year increase with a figure of 0.4% and 1.7% respectively. The general movement of the USD and EUR recently, has been a converse one it is no surprise that the positive USD data did nothing to help the EUR.
EURUSD moved similarly to the GBP/USD as both the GBP and EUR released under forecast data within an hour of each other. The EUR went from highs of 1.06295 to lows of 1.05656 and at present we see it sitting at 1.05811.
You tend to hear a lot that due to rising oil prices and a strong dollar inflation has increased but I wanted to take a minute to explain what this means. In general oil prices and the USD tend to move conversely. A strong USD makes oil purchases more expensive potentially slowing demand. Whereas a weaker USD can drive demand as it makes importing oil cheaper. We have recently seen this inverse correlation change though as oil prices have been lifted by OPEC agreements causing production cuts and the dollar has received support from potential rising interest rates. Most fear that this strong USD and rising oil prices may seriously contribute to rising inflation.
We have a busy day for the USD with manufacturing sales CPI, retail sales and empire state manufacturing Index released from 13:30 to 14:15. Part two of Yellen’s statement comes today at 15:00 when she will be answering questions about yesterday’s statement, expect potential for further USD gains if data and questions prove positive.