Market Brief: The uptick in UK inflation earlier in the week gave the pound a much-needed boost.

14 Sep 2017

Shaun Garrett

Dealing team

Today's data release

  Key levels
12:00 UK Bank of England decision   Support Resistance
13:30 US initial jobless claims   1.3163 1.3333
13:30 US CPI data   1.0971 1.1247

Market overview

Despite the uptick in inflation, GBP crosses failed to kick on in early trade yesterday, as analysts delved into the detail of the week’s second major UK release, the UK Employment report. Whilst headline unemployment ticked lower to 4.3%, its lowest level in 42 years (levels not seen since 1975), anaemic wage growth weighed on the Pound. In effect real wages are falling with wage growth inflation now at 2.1% yoy, as UK inflation (back up at 2.9%) puts a squeeze on consumers’ pockets. It will be interesting to see what the Bank of England and Mark Carney make of this at the policy announcement later today.
The greenback on the other hand outperformed all of its major counterparts in European trading yesterday despite weaker than expected data from the Bureau of Labour Statistics which reported that the Producer Price index rose 0.2% in August, below the consensus for a 0.3% gain, yet higher than last month’s -0.1%. EURUSD initially spiked on the release but quickly reversed lower to decline about half a percent. Similar to EURUSD, the Dollar Index (DXY) has extended gains yesterday to wipe out most of last week’s decline. The index has made a sustained break above a key resistance level at 91.92, the 2016 spike low, which had proved to be an obstacle earlier in the week.
The President of the European Commission, Jean Claude Juncker, has told the European parliament that Britain would soon regret its decision to leave the EU, in his annual speech on the state of the EU. Overall it was a pretty upbeat speech focusing on his vision on the future and highlighting uplifting facts such as the news that Europe’s economy is now growing faster than America’s, the migrant surge is receding and Brexit has not proved fatal to their union. His vision is for the Europe Union to both expand (adding more countries) and integrate, under one EU President and one EU Finance Minister.
In other news, the AUD rallied on stronger than expected employment data, with AUDUSD pushing about 0.8000. Although this was to some extent short lived when Chinese economic data missed estimates and there was some degree of sell off. 

The day ahead

Turning our attention to the day ahead – we have US CPI inflation out at 13.30. However all eyes will be on Bank of England today at noon. It.could be an interesting one indeed. With inflation now back up at 2.9%, there are murmurs that chief economist Andy Haldane is thought to be one MPC member who could join Michael Saunders and Ian McCafferty in calling for rates to rise. Recall that at the beginning of the week it was expected that the BoE would keep policy on hold with Bank rate held at 0.25% and that the vote would likely be 7-2 , with McCafferty and Saunders maintaining their votes for a 25bp hike in rates. However, some experts think that Andy Haldane or even Governor Mark Carney himself, may also shock markets. Recall that in a speech in June he mentioned the fact that the BOE could not ignore rising prices indefinitely. Whilst our economists do not feel there will be any surprises, it will be interesting to see whether the Governor will put his money where his mouth is! 

Thought of the day

The ancient philosopher Confucius once said, "Our greatest glory is not in never falling, but in rising every time we fall." Sterling certainly heeded these words yesterday by recovering to 12 month highs vs the dollar, before falling again this morning. Despite higher inflation, poor UK wage growth remains one of the main stumbling blocks for the pound and the Bank of England announcement and press conference this afternoon will be key in determining which part of Confucius’ wise words will apply to the pound. 

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