Inflation diverges across the Atlantic ahead of central bank bonanza

Claire Hogarth18/Jun/2014Currency Updates

GBP

Sterling/dollar was choppy yesterday ahead of a big day for the countries today, spiking up and down in half percent waves. It eventually ended around where it started. Trading against the euro was flat.

Poor inflation figures from the UK came as a bit of a surprise yesterday, with the headline figure dropping to 1.5% YoY for May, caused by a fall in prices of 0.1% from April. The UK has been seeing gradual disinflation since it last hit the 2% target consistently, back in Q3 2013, so the government will be keen to avoid an EU style descent towards deflation. Poor inflation also puts pressure on Carney to delay his interest rate hike until prices and wages have stabilised again.

The key play today will be the minutes from the Bank of England’s meeting earlier in the month. After Carney told the world on Thursday to consider higher interest rates sooner rather than later, it will be interesting to see if a similar discussion was had in the privacy of Threadneedle Street.

No other data out today.

EUR

The single currency has been little more than a spectator this week, again yesterday doing little more than bouncing around resistance levels.

The only data yesterday were economic sentiment surveys from ZEW. Both Germany and the EU as a whole disappointed to the downside.

Only EU construction output for April to spark any interest this morning.

USD

The dollar was pretty much a mirror image of the pound yesterday, bouncing up and down throughout the day. Instead of disappointing inflation we had a better than expected number, and instead of waiting for the central bank to raise interest sooner than expectation, markets wait to see if the Fed will keep monetary policy loose for a little longer.

In contrast to the UK, US inflation numbers were stronger than consensus, coming in at 2.1% for the year to May, after a 0.4% rise in the last month. This is the best reading since October 2012. Figures were positive even when excluding food and energy, which shows a healthy and balanced growth.

However the perennially underachieving US housing market, a key reason for the IMF’s recent growth forecast revision, failed to impress again this month, with new home starts and house building levels disappointing.

As with the UK, today will be all about the central bank. We have the interest rate and asset purchase decision, where the Fed is expected trim by QE by another $10bn, followed by the press conference.

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Written by Claire Hogarth

Marketing Executive at Ebury. English Literature graduate from the University of York and a motivated professional.