Pound soars as inflation in the UK turns positive in July
19/Aug/2015 • Currency Updates•
An unexpected return back to positive inflation in the UK yesterday caused the Pound to rally strongly against its peers, ending 0.5% higher versus the Dollar and 0.9% against the Euro. The UK currency returned to a seven year high in trade weighted terms.
Inflation in the UK economy exceeded expectations yesterday, with the headline consumer price index registering positive growth of 0.1% in the year to July, following flat inflation in June. Even more impressively, core inflation, which strips out volatile priced products such as food and oil, soared to its highest level in five months, increasing from 0.8% to 1.2%. According to the ONS, the slight increase was due mainly to price increases in clothing compared to this time last year.
The positive data will be good news for Bank of England hawks. However, with food and fuel prices looking likely to remain subdued in the coming months, the Bank of England has stressed that price growth is likely to remain around zero in the near term, and may even fall back into deflation.
Elsewhere, ONS announced the retail price index remained unchanged at 1% growth, while the DCLG measure of house prices increased by 5.7% in July, slightly down on previous.
No major data out in the UK economy today could lead to reduced Sterling volatility during the London trading session. Retail sales on Thursday and public sector borrowing on Friday are the only remaining data points out this week.
Mostly positive data out of the UK and US caused the Euro to finish yesterday’s London session lower versus both the Pound and the Dollar (-0.3%).
News out of the Eurozone remained at a premium yesterday, with a quiet August trading meaning that much Euro movement was down to events elsewhere. A lack of any major announcements meant that attention turned back to Greece. Lawmakers in the country held an emergency parliament session for a crucial vote on ratifying their last minute bailout deal. Germany cast doubt over the agreement, raising question marks over Greece’s debt sustainability, the role of the International Monetary Fund and over-privatisations. Meanwhile, speculation continued that Greece is heading for a snap election, following a lack of support behind Prime Minister Tsipras after the unpopular new bailout agreement.
This morning will see the release of the current account and construction output data for the Eurozone, which could cause moderate volatility in the single currency.
Mixed housing data out in the US economy yesterday caused the US Dollar to end just 0.1% higher against the basket of its major peers.
There was encouraging news in the US yesterday afternoon in the form of US housing starts, which rose to a near eight year high last month. The monthly figure released by the Commerce Department, which measures how many new single-family houses were constructed in the US, increased by 0.2% to 1.206 million, after a contraction had been forecast. Housing starts have impressed of late, and have now been above the one million mark for four straight months. Housing is clearly benefitting from a tightening labour market, with yesterday’s data, combined with solid payrolls and retail sales, suggesting the US economy has got off to a good start in the third quarter of the year.
By contrast, building permits, a leading indicator of future housing construction, plunged by 16% to 1.119 million in July. However, this followed three consecutive months of hefty increases, with the decline likely to be related to the expiration of a tax incentive in New York. Permits fell by 60% in the Northeast alone.
Inflation figures for July out in the US this afternoon will be the main focus during the London trading session. The main attention in the global markets will, however, be on the release of this evening’s crucial FOMC meeting minutes at 7pm. Investors will, as always, be looking for clues as to interest rate hike timing.
Rest of the world
Turkey’s Lira hit a fresh record low after its central bank voted to leave rates unchanged despite recent TRY weakness and political uncertainty.
Meanwhile, Poland’s central bank surprisingly opened the door to an interest rate hike, while the South African Rand weakened on expectations of hawkish FOMC minutes.