UK inflation rises as Eurozone GDP shrinks

Tom Tong15/Aug/2012Currency Updates

GBP

Yesterday we saw a surprise increase in inflation in the UK as the Consumer Price Index increased 0.2% from June to a figure of 2.6%. The increase in inflationary pressure was attributed to the soaring cost of air fares, travel and early clothes sales. The RPI figures also increased by a similar margin but analysts are positioning the figures as a blip with inflation still expected to fall by the end of the year. Today we are eagerly watching the Bank of England Minutes for any clues on future policy decisions and rate changes.

EUR

The Euro fell against the dollar yesterday but saw a brief rally against sterling as the markets digested worse than expected GDP figures for the Eurozone as a whole. The Eurozone GDP figures showed that the collective economy had shrunk for the second quarter but the German behemoth continued to the buck the trend of the periphery showing modest signs of growth. However, the German ZEW survey on economic sentiment came in lower again this month to mark the fourth straight monthly decline and an annual low.

European Equity Markets moved higher on the anticipation that the poor figures would hasten any action from the ECB and European leaders to stimulate economic growth and stave off the months of negative news. Elsewhere the picture was also bleak as borrowing from Spanish banks reached record highs as money market liquidity dried up and the only alternative was to borrow from the ECB with net ECB borrowing reaching 337 billion Euros for June.

Finally, Greece have decided to re-enter the frame as it seeks a two-year extension to its austerity programme. Antonis Samaras, the centre-right prime minister, is expected to outline the proposal during talks next week with Angela Merkel, German chancellor, in Berlin and French President François Hollande in Paris. It comes as Greece struggle to find a further 11.5bn EUR of spending cuts, to be implemented in 2013 and 2014 under the current bailout arrangements.

USD

The dollar performed well yesterday as US retail sales figures beat all expectations and continued the slew of positive data for the world’s largest economy. The retail sales figures grew by 0.8% in July, 0.6% above the consensus estimate, causing much speculation by commentators that third quarter GDP figures would be a stark improvement on the previous quarter. We will be watching the market today for the US CPI figures which are expected to be down by 0.2% with the US Fed seemingly much more in control than the BoE in controlling inflationary pressures.

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Written by Tom Tong

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