UK inflation edges down in January to lowest on record

Enrique Díaz-Álvarez18/Feb/2015Currency Updates

GBP

A brief spike in the Pound was not sustained on Tuesday morning, with Sterling ending the day unchanged against the Dollar after mixed inflation data.

Inflation in the UK hit an all-time record low in January, plunging to a meagre 0.3% on an annualised basis. This marked the smallest increase in the Consumer Price index since the ONS began producing the data in 1996. The move largely reflects the falling oil prices, which last month dropped to $45 a barrel. However, encouragingly the core inflation level, which excludes volatile priced products, surprised to the upside, climbing to 1.4%. While significantly below the 2% Bank of England target, low headline prices should boost consumption and was claimed as “indisputably good news for the UK consumer” by Chancellor George Osborne. More data from ONS showed retail prices climbed by 1.1%, down on December’s 1.6% increase, while the producer price index plummeted to -1.8%, lower than at any time during the financial crisis.

This morning looks set to be another busy day in the UK economy. The Bank of England will be revealing its vote on interest rates, having last month unanimously decided to keep interest rates unchanged for the first time since June. Earnings and unemployment data out, all at 9.30am should make for a frantic mornings’ trading.

EUR

The Euro recovered much of the ground lost on Monday evening as investors expect a conclusion to be reached in the Greek drama. Finance Minister Varounfakis remains upbeat regarding a potential deal. An agreement sooner rather than later is required, as Dutch Finance Minister Joroen Dijsselbloem, Chair of the Eurogroup meeting, claimed there were just days left for talks to take place. The single currency ended the day 0.6% up versus both Sterling and the greenback.

Away from Greece, survey data from ZEW showed a substantial increase in sentiment in Germany. Aided by the announcement of the ECB’s quantitative easing measures and improved growth in Q4, sentiment among financial market experts rose by 4.6 points to 53.0, its highest in twelve months. Similarly, the measure for the wider Euro-area also improved, climbing from 45.2 in January to 52.7 in February, its best reading since June. Yet, the intensification of the Ukraine crisis and the situation in Greece are dampening expectations somewhat according to ZEW President Clemens Fuest.

No major data out in the Eurozone today, although the ECB will be holding its non-monetary policy meeting before markets open in London.

USD

A surge in the Dollar as New York trading opened for the week following Monday’s national holiday was not enough to prevent the Dollar falling on its peers during the course of London trading, ending 0.35% down.

The National Association of Home Builders housing market index fell unexpectedly, declining to a four month low of 55.0 in February having registered 57.0 in January. A level in the mid-50s is consistent with the modest ongoing recovery in the housing market, with a level above 50 meaning more builders view market conditions as favourable rather than poor. In New York, business activity for manufacturers continued to expand, although at a slower pace. The headline business confidence index edged downwards to 7.78.

Today will see a string of data releases including building starts and industrial production. The main event, however, will come after trading closes in London at the release of the FOMC meeting minutes at 7pm.

Rest of the world

Swiss National Bank (SNB) Chairman Thomas Jordan announced he believes the Swiss Franc is still overvalued. The negative interest rate will have a corrective effect according to Jordan, although the central bank will intervene in the FX market if required.

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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.