UK inflation accelerates, businesses reconsider exposure to US Dollar
13/Apr/2016 • Currency Updates•
The UK economy received a timely boost on Tuesday after data suggested that inflationary pressures may be returning to the domestic economy.
Headline inflation in the UK, as measured by the consumer price index, rose above expectations by 0.5% in the year to March, beating forecasts of a 0.4% rise, and registering its strongest reading in 15 months.
This will be good news for the more hawkish members of the Bank of England’s monetary policy committee and continues to validate our call that interest rates in the UK will rise at towards the end of 2016.
An improvement in domestic economic conditions, and the possibility of higher rates in the UK in the fourth quarter should, in our view, cause Sterling to end the year moderately higher against the US Dollar and significantly so versus the Euro.
This would allow businesses to take advantage of current Sterling weakness, something that has plagued British importers since the currency began plunging in early December.
The US Dollar recovered over the course of the trading session yesterday, having plunged to its weakest position since August 2015 earlier in the day. The US Dollar index remains over 5% lower since the beginning of 2016, providing US Dollar buyers with an ideal opportunity to hedge their currency exposure before the US Dollar resumes its anticipated strengthening.
Elsewhere, the Euro weakened sharply ahead of today’s industrial production figures, which are expected to show another monthly decline.
A rally in oil prices to a 2016 high also provided support for commodity driven currencies, with the Australian Dollar and Russian Ruble performing particularly well on Tuesday.
Major currencies in detail:
Despite rallying to a near two week high, the Pound ended the session 0.1% lower against the US Dollar yesterday.
An earlier than usual Easter holiday provided a boost to inflation in the UK economy last month according to the ONS, pushing up airfares and reassuring the Bank of England that the era of near zero price growth may be coming to an end.
Core price growth, which strips out volatile price products such as energy, also soared to 1.5%, its highest level since August 2014. The recent sharp depreciation in the Pound, which has fallen by 10% in trade-weighted terms since the beginning of December, no doubt played a part.
Meanwhile, the IMF cut its forecast for UK economic growth yesterday to 1.9% from 2.2% in January. The governing body warned that an EU exit in June was a ‘very real’ possibility, suggesting it could cause ‘severe regional and global damage’.
Early gains for the single currency were wiped out and the Euro finished 0.5% lower against the US Dollar.
German inflation figures remained unrevised on Tuesday at a lowly 0.1% for the year to March. A complete lack of inflation in Europe’s largest economy remains a significant concern for the ECB and continues to ramp up pressure on the Governing Council to inject further stimulus into the Eurozone economy.
Even Bundesbank head Jens Weidmann, one of the more hawkish members of the ECB, claimed that adopting an expansionary policy stance was appropriate.
Euro-wide industrial production figures his morning will be the highlight in the Eurozone today. We think another weak reading will bring back into focus the ‘divergence’ theme between the Eurozone and the US and, as a result, the Euro will have trouble maintaining current levels.
The Dollar rebounded on Tuesday, rallying by 0.2% against its major peers. This was fuelled in part by gains against the safe-haven Yen following a rebound in oil prices and subsequent improved risk appetite.
Across the pond yesterday, prices of imported and exported goods continued to decline in March. Import prices rose for the first time in nine months, although extended its decline on an annualised basis to 6.2%.
Federal Reserve member Patrick Harker also opened up the possibility that the US central bank could hike as much as three times in 2016. Harker claimed that a hike as soon as June was in play, although this would be dependent on growth and inflation figures in the coming weeks.
Focus in the US today will be on the monthly retail sales figures, which are expected to show a modest improvement following last month’s negative reading.
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