Downside inflation surprise causes Sterling to tumble against the Dollar

Claire Hogarth15/Oct/2014Currency Updates

GBP

The Pound plummeted by 0.8% versus the Dollar on Tuesday as cable reached its lowest level in 11 months amid weak inflation data. Sterling depreciated against 12 of its 16 major counterparts after a National Statistics report released at 9.30am yesterday morning showed that the Consumer Price Index (CPI) nose-dived YoY in September from 1.5% to 1.2%. This dismal figure represents the lowest price increase in the UK since October 2009 at the height of the financial crisis. The Core Consumer Price Index, a measure of price movements excluding seasonally volatile products, also crashed to 1.5%, equalling its lowest level since February 2009.

Sterling’s decline by 0.5% in a frantic half an hour period was exacerbated as, not only was the CPI data lower than previous, but also much lower than economists had predicted. This announcement will inevitably add further pressure on the Bank of England to keep interest rates at record lows.

The data heavy week continues today in the UK with a number of additional National Statistics releases at 9:30am. The Claimant Count, measuring the number of unemployed people in the UK, is expected to show a slight improvement on last month while the Average Earnings data for August is also predicted to yield a greater MoM value.

EUR

Not long after the bleak CPI data was announced in the UK, the Eurozone suffered from weaknesses of its own as both Industrial Production and Economic Sentiment registered lower than expected readings. Despite this, the single currency was able to gain 0.4% on the Pound and remain stable on the Dollar.

At 10am Eurostat announced that Industrial Production fell by 1.9% YoY in August, one percent lower than expected and equalling its greatest decline in eighteen months. In addition, the ZEW Economic Sentiment data for October, released in Mannheim, recorded its first negative figure in almost two years of -3.6, lower than the 1.0 that was predicted and much lower than the 6.9 of the previous month. Furthermore, the figure representing the assessment of the current economic situation, published by the research institute, also declined in Germany from 25.4 in September to just 3.2 in October, the lowest value since June 2010.

More commentary on this is awaited today as the ECB President Draghi will be making two separate speeches, firstly at a statistics conference in Frankfurt at 8am, followed by a further speech at 7pm, also in Frankfurt.

USD

The greenback benefitted from the UK’s surprising CPI announcement and was able to climb by 0.8% on Sterling during the day’s trading. USD has now strengthened by 3.8% in a little over three weeks on the Pound, and appears to be the best placed country to weather the current worldwide slowdown. This was reflected in the US Dollar Index that increased by 0.4% after a steady decline throughout all of last week. The US now seems to be in much better shape than the UK, with analysts indicating that this will be reflected in the timing of an interest rate hike. This is the message we have been saying for a while now.

While no major data was released in the US on Tuesday, the Redbook index, an index of same-store sales growth in the country, rose from -0.3% in September to zero in October. There are a number of releases in the US today, most notably at 1:30pm London time with the release of the Retail Sales data for September.

Rest of the world

Brazil’s Real fell on Tuesday after a voter poll showed that President Dilma Rousseff is tied with the opposition candidate Aecio Neves in the current Brazilian general election. The polls for the election have been a major driving force behind the currency in the past few weeks, with the latest poll making investors especially cautious. The currency slid by close to 0.4% during morning trading and has now lost 6.5% of its value since the beginning of September.

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Written by Claire Hogarth

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