UK inflation at 12 year low as fuel costs continue to fall

Enrique Díaz-Álvarez17/Dec/2014Currency Updates

GBP

Having dipped early on, the Pound rallied to finish 0.5% up on the Dollar.

Three leading UK banks have been found short of capital in the first Bank of England stress test to gauge the ability of financial institutions to withstand a potential economic downturn. The stress test examines banks’ capability to weather a number of varied scenarios including sharp declines in GDP and Sterling as well as increases in unemployment and inflation. The Co-operative bank failed the test, while Lloyds and RBS were both found at risk, although the results of the demanding test demonstrated growing confidence in a significantly more resilient system according to Bank of England governor Mark Carney.

The UK inflation rate fell more than expected to a 12 year low of 1% in November. The CPI measure was down from 1.3% last month and, while a drastic decline, this can be mostly attributed to the recent oil price slump, with petrol prices down by 5.9% last month. A fall below 1% now looks “more than likely” according to Mark Carney, although the Bank of England Governor did not appear overly concerned in his speech yesterday due to the boost in consumer spending it will bring. Elsewhere in a busy day for the UK economy, the Retail Price index fell to an annualised 2% from 2.2%, the Producer Price index fell by 0.1% YoY while the PPI Core Output rose by 0.5% to 1.4% YoY in November.

At 9:30am this morning the Bank of England will be announcing its interest rate decision.

EUR

Despite hitting a three week high on the Pound the single currency fell overall by 0.1% on the UK currency but finished 0.4% up on the greenback.

Investor confidence in Germany jumped again to its highest level since May according to the latest ZEW Economic Sentiment survey which climbed above forecasts to 34.9, up from 11.5 in November. Favourable economic conditions including a weak Euro and low crude oil prices were attributed to the increase. The same measure in the Eurozone as a whole, however, unexpectedly fell to 10.0 from 11.0, well down on the 20.1 that was forecast. Earlier, manufacturing and services growth both grew in the Eurozone, with the flash PMI’s coming in at 50.8 and 51.9 respectively, both above forecasts.

Inflation in the Eurozone is expected to edge closer towards zero today with the release of the Consumer Price index at 10am GMT.

USD

Some disappointing data out of the US caused the US Dollar index to decline by 0.3% during the course of the day on Tuesday.

The number of new family homes constructed in the US in November fell by 1.6% to 1.03 million, with steady gains in prices putting new homes out of reach for many according to economists at Morgan Stanley. Building permits for privately-owned housing also fell to a seasonally adjusted annual rate of 1.035 million, substantially down on the 1.06 million that was forecast. More disappointing news for the US economy as the manufacturing sector grew by its lowest amount in eleven months according to Markit’s flash PMI, which declined to 53.7, down from 54.8 last month.

A very busy day in the US today begins with the inflation figures for November at 1:30pm followed later by the Federal Reserve’s monetary policy statement at 7pm London time.

Rest of the world

A host of emerging market currencies featured heavily in the news yesterday. The Russian Central Bank surprised markets by hiking interest rates by 6.5% to 17%, sweeping panic across the Russian financial markets. The Ruble again went into freefall for the second day, falling by as much as an astonishing 19%, before ending the day 9.7% down on the Dollar and putting further strain on Vladimir Putin’s leadership. Elsewhere, the Indian Rupee fell to a 13 month low while Norway’s Krone declined as crude oil dipped below $59 a barrel for the first time since May 2009.

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Written by Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.