Sterling plunges as UK inflation turns negative
20/May/2015 • Currency Updates•
The Pound sank on Tuesday, depreciating by 1% against a stronger Dollar after inflation in the UK officially turned negative for the first time in more than fifty years.
Yesterday it was announced that consumer prices fell by 0.1% on an annualised basis in April, forced down by lower air fares and ferry tickets over the Easter period according to the Office for National Statistics. Transport prices declined by 2.8%, with alcohol, clothing and household goods all experiencing a drop in prices from a year previous. Chancellor George Osborne was quick to echo words earlier in the week from Mark Carney, drawing the distinction between negative inflation and a more damaging period of full-blown deflation. UK price growth is expected to remain around zero for much of the year before picking up towards the end of 2015. This should lead to higher disposable incomes, greater spending, and improved economic growth. In the same report, the ONS announced UK house prices increased by 9.6% in the year to March, the first increase in price growth in seven months, driven primarily by Scotland and the South East.
Wednesday morning will see the release of the Bank of England’s minutes from its May monetary policy meeting, including the all-important vote on interest rates. The minutes themselves will likely be slightly lower key than usual, given the recent release of the inflation report last week.
The single currency weakened early in trading yesterday following the announcement that the European Central Bank would be increasing its monetary stimulus in May and June. The Euro ended trading 1.3% lower on the Dollar.
On Tuesday morning, the Governing Body promised to “frontload” its bond purchases before the summer in order to drive down the value of the Euro and yields on government debt. This will enable the central bank to increase purchases in the next couple of months, while maintaining the monthly average of 60 billion Euros. The fall in the Euro would increase the price of imports, and likely help lift inflation in the Eurozone, which yesterday was confirmed at zero in April.
Traders positioning is likely to have been a key factor in both today’s move and the recent sharp Euro rally. Reports that long-dollar position has been essentially cleared out makes the single currency vulnerable to the opposite direction in monetary policy across the Atlantic. Elsewhere, the trade surplus widened further last month, increasing from 20.3 billion Euros to 23.4 billion Euros.
Almost overshadowed by the Bank of England and Fed today, will be the ECB’s non-monetary policy meeting at 8am this morning.
The Greenback showed broad strength again on Tuesday following strong US data. The Dollar index rose by 1.1%.
Unexpectedly strong US housing data led to a sharp rally in the Dollar yesterday afternoon. Housing starts, which measures how many new single family homes were constructed, soared above forecasts to its strongest pace since 2007, a further sign that the US housing market is building momentum. Construction surged an astonishing 20% from a month previous to a seasonally adjusted 1.135 million in April. Similarly as impressive, the number of building permits, a good measure for future home construction, also trumped all expectations, climbing by 10.1% to 1.143 million. The promising data gives another indication that the slowdown in US growth may have been a consequence of the poor winter weather. Housing starts in the Northeast, the region hit hardest by snowstorms in the winter, soared by a remarkable 86%.
After markets close for trading in London this evening, the Federal Reserve will be releasing its minutes from the April FOMC meeting. The emphasis of the minutes is likely to be on data dependence, with the Fed reiterating that weakness in the US economy in the first quarter was temporary and should be reversed over the coming months. Any surprises either way will inevitably cause volatility in the major currencies.