UK inflation figures surprise to the upside as sterling rallies

Claire Hogarth16/Jul/2014Currency Updates

GBP

Sterling moved up against the dollar yesterday as UK CPI surprised to the upside, moving to 1.9% from 1.6%, increasing pressure on Mark Carney to hike rates to keep inflation at target levels. It also benefited from poor US retail sales figures that weakened the dollar. German ZEW was weak which gave the pound room for gains against the single currency as well throughout the early morning.

David Cameron reminded investors of the upcoming election in May by clearing out dead wood from his cabinet, replacing some male veterans with fresh female candidates. In the first part of 2015 we will see volatility as investors look to see what impact a new or coalition government will have on economic policy given Osborne’s successful term as Chancellor. Mark Carney was speaking at the Treasury select Committee but there were no fireworks as he mainly spoke about banks leverage ratios and criticised the Bank of International Settlements, commenting that they spoke from a bubble outside central banking reality. The London property bubble continues with the ONS revealing house prices had jumped by a fifth in the year to May. Government policy makers will continue to monitor the situation in case new legislation is needed to avoid an asset bubble.

USD

The dollar took a beating from sterling yesterday, strong UK CPI combined with poor US retail sales data pushed the cable price up by nearly a cent. Whereas it made inversely similar gains against euro following terrible German ZEW data – clearly considered a more concerning matter than the US retail sales. None of this data had a huge effect on the US bonds market as yields on 10 year Treasury notes remained largely unchanged.

Janet Yellen responded by suggesting that the US need to continue with their monetary stimulus to combat persistent job market weakness. These comments were all made in a prelude to her testimony later today where we suspect she will push back any eagerness to increase interest rates before the consensus of Q1 2015. Her continually dovish stance is something that will have a strong effect on the choices of other central banks, predominantly Mark Carney and the BoE.

Data of note released today are Yellen’s testimonial speech and Industrial Production.

EUR

Economic sentiment in in the German economy printed well below expectations, falling from 62.3 to 48.1. This significant drop displays that the institutional investor sentiment is generally pessimistic across the board. The German economy has traditionally been the Eurozone’s most reliable powerhouse since the financial crisis and now investors are less confident than at any point since 2012. Swedish manufacturer SKF also expressed scepticism about the European recovery, forecasting little uptick in demand from the continent in the quarter ahead.

Espirito Santo’s financial crisis deepened as questions were raised over Rioforte, one of its companies, would be able to repay over 1bn USD in debt to Portugal Telecom. The share price of BES, Portugal’s top lender, closed at just under 0.38 cents, down 70% from April. Portugal’s stock and bond markets were thrust into turmoil last week after it emerged BES may default on its debt repayment.

No economic data releases of note out today.

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Written by Claire Hogarth

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