Sterling gains in spite of falling inflation

Tom Tong26/Mar/2014Currency Updates

GBP

The pound gained across the board yesterday on the back of UK inflation data, taking 0.8% from the dollar, although gains against the single currency were checked in late afternoon by the irresistible Mario Draghi. Inflation showed falls, though some traders had priced in further falls in inflation.

UK inflation levels have slipped back to their lowest in four years, yesterday’s official figures show. CPI for February was recorded at 1.7% YoY for February, down to 0.3% below the official inflation target of 2%. Inflation is one of the greater macro risks that comes with artificial economic stimulus, so the sub-par data allays fears of centrally induced inflation trouble, and has also eased pressures on the Bank of England to increase interest rates any earlier than expected. It also means prices are only outstripping wages by 0.3% year, buoyant news for consumer confidence. However, some traders had priced in a steeper decline in CPI, whilst RPI and Core CPI did not come in as low as expected and thus sterling saw mild gains on the back of this release.

Away from inflation we also saw mortgage approvals drop off slightly to 47.6k for February, from 50k in January, although we have mentioned before how January often sees a bump in figures at the start of the year. One aspect of inflation data that did come in to the upside was February’s house price index, which jumped 1.3 to 6.8%. This may add weight to the oft-touted housing bubble theory, although Mark Carney was quite definitive last month in telling MPs that the UK housing market is still only at 75% of pre-crisis levels. This is compared with GDP for example, which surpassed pre-recession levels back in 2010.

No data of note today.

EUR

Markets reacted positively to Mario Draghi’s afternoon speech, with the euro taking half a cent off both the dollar and the pound. EUR/USD is managing to stick just a cent or so under those four year highs seen earlier in the month, although most analysts predict it to begin peeling away eventually.

The headline message coming from the ECB yesterday was that it ‘will do what is needed to maintain price stability’. Investors latched on to the possibility of increased central stimulus next month, which may possibly include negative interest rates. The President also backed the continued use of monetary policy as a means to maintain economic stability, as the deharmonisation of monetary and fiscal policy among Eurozone members is often quoted as one reason for the currency bloc’s past woes.

The IFO in Germany also released a trio of survey results yesterday, measuring business expectations and market sentiment. Two of the three measures came in under expectation, although only just, whilst the third measure of current assessment jumped by almost a whole basis point. A mixed bag to say the least.

The only data offering of note today is Italian retail sales for January, after a German consumer confidence survey came in this morning bang on target at 8.5.

USD

With very little action from the US yesterday, the greenback’s only movement came from UK and EU led swings. The dollar ended up losing ground against both pairs, as the pound and the euro both gained from positive action in their respective nations, at around a cent and half a cent respectively.

Yesterday did see a positive redbook index, at 3.1% YoY for March. House prices also rose over January, increasing by 0.8%, a 0.1% increase MoM. Consumer confidence rose to 82.3 from 78.6 in February. New home sales did fall by 3.3%, but that figure is 1.6% better than expected.

US markets still reeling from last week’s FOMC decision, will perhaps be glad of the respite in data as they get a rare chance to reflect. Most of the action this week will be away from currency markets, with a number of high profile IPOs to look out for, as well as the expected signing of a momentous free trade agreement between the EU and the US.

Things to look out for today include mortgage applications and durable goods orders, as well as a Markit Services PMI.

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Written by Tom Tong

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