Weak UK inflation figures halt Sterling rally, businesses hedge Pound exposure
18/May/2016 • Currency Updates•
The Pound’s sharp overnight rally on Monday was brought to a premature end yesterday following the release of fairly underwhelming inflation figures in the UK.
Headline inflation in the UK slowed unexpectedly last month, with the consumer price index growing by just 0.3% in the year to April, the first decline in the measure since September. With well below target inflation likely to delay a potential interest rate rise by the Bank of England, it’s no surprise that around 80% of British companies have taken steps to hedge their Sterling exposure recently.
Earlier Sterling had soared to its strongest position against the US Dollar in two-and-a-half weeks after the latest EU referendum polls released on Monday evening showed a growing lead for the remain vote.
Despite this, UK business owners are increasingly looking to protect their Sterling exposure through hedging, given that short-term downside risk for the Pound seems to be outweighing the upside.
We also saw a rather significant downward move in the Euro overnight, with investors bringing forward their expectations for the next US interest rate hike following hawkish comments from Fed officials. Senior FOMC rate setters Dennis Lockhart and John Williams both claimed that two or three hikes are still possible this year.
Inflation in the US economy picked up pace last month. The index increased 1.1% in April and will no doubt ramp up further pressure on the Federal Reserve to hike interest rates again in the coming months.
The Federal Reserve’s meeting minutes at 19:00 UK time will be the highlight of trading today and could shed more light on the likelihood of the second post-financial crisis US rate hike at either the June or July meetings. A more hawkish tilt could cause investors to bring forward their expectations for a hike to either of the next two meetings, which would likely provide good support for the US Dollar today.
Also yesterday, the Australian Dollar soared across the board after minutes from the Reserve Bank of Australia’s meeting were less dovish than expected and calmed speculation that the central bank could be ready to cut interest rates again.
Major currencies in detail:
Weak inflation data on Tuesday sent the Pound 0.4% lower against the US Dollar.
The underwhelming inflation data will be a significant disappointment to the more hawkish members of the Bank of England’s monetary policy committee, which remains a long way off hiking interest rates for the first time since the financial crisis. According to the ONS, the core measure also slowed, falling back to 1.2%
The BoE expects inflation in the UK to remain low and close to current levels until the latter part of the year, when the base effects of the recent oil price decline begin to filter out of the index.
Major announcements in the UK continue today with the release of the latest labour report this morning.
The Euro fell by 0.6% against the US Dollar overnight following hawkish comments from Fed members yesterday evening.
The trade surplus in the Eurozone swelled more than expected in March according to the latest figures from Eurostat. The surplus increased to a three month high of 28.6 billion following a 2.7% drop in imports.
A number of ECB members also spoke during trading yesterday. Ignazio Visco warned in Frankfurt that there remains a ‘concrete deflation risk in the Eurozone’, while Daniele Nouy claimed that lenders in the currency bloc need to adapt to lower interest rates.
Inflation figures for the Eurozone are set to be released at 10:00 UK time. Headline consumer price growth is forecast to remain unchanged at -0.2%. We believe a lack of inflationary pressure throughout the remainder of this year could force the ECB to loosen monetary policy again in the coming months.
Strong inflation figures in the US and increasing expectations for Fed rate hikes sent the US Dollar index 0.6% higher yesterday.
Consumer prices in the world’s largest economy rose at their fastest pace in three years last month according to the US Labor Department. Headline inflation rose by 1.1% in the twelve months to April following a slightly better than expected 0.4% increase on a month previous.
The core index, which strips out the volatile energy component, dipped to 2.1%, although still remains above the Federal Reserve’s 2% target level.
Tonight’s FOMC minutes will undoubtedly be the focal point in the US economy and, indeed, global currency markets today.
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