Sterling falls again as July CPI falls sharply

Claire Hogarth20/Aug/2014Currency Updates

GBP took a pounding on Tuesday after July CPI surprised strongly to the downside, falling to 1.6% from 1.9% in July. By contrast, housing market data from the United States comfortably beat expectations. The question on everybody’s mind is whether the economy of the UK will decelerate, dragged down by sterling’s rally and European stagnation, or whether it will manage to keep growing at recent levels of around 3%. Sterling sank 0.6% against the dollar and 0.3% against the euro.

GBP

Yesterday, the UK’s economy prospective diminished after releasing multiple bad reports. Inflation in the UK cooled by more than expected in July, easing pressure on the Bank of England (BOE) for an early rise in interest rates. The annual rate of inflation fell to 1.6% in July from 1.9% a month earlier. The fall was larger than economists were expecting. Economists had expected the annual rate to dip to 1.8% in July. The slowdown takes the annual rate of inflation comfortably below the BOE’s 2% target. Producer price indices were also below expectation.

At 09.30 local time minutes from the BOE’s August meeting will be released. It will be interesting to see both the internal discussion on interest rate policy and the uniformity of voting across members.

EUR

Another quiet day in the Eurozone. The current account balance, a broad measure of an economy’s international financial position, was in a surplus of EUR 13.1 billion in adjusted terms in June, below EUR 19.8 billion in May. The EUR gained about 0.3% versus the GBP and declined the same versus the USD.

No market-moving reports expected today from the Eurozone.

USD

Construction on new US homes jumped 15.7% in July to the highest level in eight months and starts were revised up sharply for June, indicating a pickup in home building after an early-year lull. Housing starts climbed to an annual rate of 1.09 million last month from 973,000 in June. Initially, the government had reported a big plunge in starts in June, but the revised data shows a much smaller drop. Economists had expected starts to climb to a seasonally adjusted 975,000 in July. Permits for new construction, a sign of future demand, rose 8.1% to an annual rate of 1.05 million from 973,000 in June. More healthy signs from the US housing sector continue to validate our expectation for 3-3.5% growth in the third quarter.

US consumer prices rose slightly in July, but the overall pace of inflation cooled slightly after a sharp run up earlier in the year. The consumer price index rose a seasonally adjusted 0.1% in July. The core CPI, which excludes volatile food and energy costs, also increased 0.1%. Economists had expected the CPI to increase by 0.1% overall and by 0.2% on a core basis, so core inflation undershot expectations slightly. Real or inflation-adjusted hourly wages, meanwhile, were unchanged for the second straight month.

All eyes are now on the FOMC minutes to be released at 19:00 UK time today. These will be scrutinized for clues on the expected timing of Federal Reserve hikes.

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Written by Claire Hogarth

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