Sterling Tumbles after Inflation Data
The British Pound tumbled against the US Dollar and the Euro on news that inflation in the UK fell to 2.6% in June, on a year to year basis, although market experts were estimating that it will remain at 2.9%, which was last May’s reading. Because of the inflation data released by the Office for National Statistics (ONS), analysts and traders believe that lower inflation may stop the discussions about the hiking of the Bank of England’s (BoE) benchmark interest rate.
In the US, the health care reform continues to create problems to President Trump’s administration. Two more Republican senators opposed the health care bill and now the Senate will vote to repeal “Obamacare” without offering any replacement. Markets seem to get worried that Trump’s reform agenda will be difficult to materialise.
Pound Sterling – UK Markets
Today, Sterling plummeted against the Euro with the exchange rate set at €1.12. The Pound had no better luck against the US Dollar, losing 0.3% in value and trading at $1.30. The British currency tumbled against its major competitors when the ONS published the UK’s June inflation data, which fell short of consensus estimates.
Data showed that inflation, on a yearly basis, fell to 2.6% in June, which is lower than the 2.9% reading recorded in May. As the ONS stated in its report, the drop occurred mainly because of the falling petrol prices. Economists had expected that inflation would remain stable at 2.9%, which was a four-year high. The June inflation reading of 2.6% is the lowest since October 2016, and the decline was the biggest since the beginning of 2015.
According to the ONS data, fuel prices in the UK decreased for a fourth consecutive month, while furniture, food and household goods became more expensive during June. Even with the lower inflation reading in June, real wages are getting squeezed since they are growing by only 2%. Investors and traders were disappointed by the inflation data because they believe that lower inflation will be an obstacle to any effort by the BoE to start tightening its monetary policy.
US Dollar – US Markets
The US Dollar dipped against the Euro, with the exchange rate set at €0.86. The US currency tumbled on news that two Republican senators announced that they reject the new health care bill, which aims to replace the “Obamacare” system.
Republican Senators Jerry Moran and Mike Lee joined two of their Republican comrades who had already expressed their opposition to the latest version of the Senate repeal bill. The additional loss of the two votes last night, made impossible for the Republican side to start a debate to dismantle the health law. Last Friday, the health insurance lobby had talked openly against the bill, noting that it would send premiums soaring and would cost millions of Americans their insurance.
President Donald Trump stated in his Twitter account that Republicans should just repeal “Obamacare” and work on a new healthcare plan that will start from a clean slate. Senate majority leader, Mitch McConnell has announced that in the coming days, the Senate will vote to repeal “Obamacare” without any replacement. Investors and traders are becoming increasingly worried that the Trump administration won’t be able to deliver the promised reforms in the pre-election campaign.
Euro – European Markets
The Euro rallied against the US Dollar, reaching a fourteen-month top, with the exchange rate set at $1.15. With Eurozone’s inflation falling behind the European Central Bank’s (ECB) target, attention is shifted to the ECB’s meeting on Thursday for which there are some expectations of policy tweaks, but nothing that will signal a major change.
The ECB’s Bank Lending Survey is going to be published later today. The last survey, released in April, showed that loan growth was supported by a rising demand across all loan categories. Data indicated that credit standards, which are the loan-approval criteria for business loans, had eased a bit because of the intense competition between banks.
According to Reuters’ sources, Citigroup is thinking of choosing the German city of Frankfurt as the base for its European Union (EU) operations. The report says that the US bank will move hundreds of jobs outside of London, after Brexit. Financial services firms, such as banks, need to have an EU-regulated subsidiary if they aim at offering their products across the EU-bloc.
Other Currencies – Highlights
The Australian Dollar staged a remarkable rally against Sterling. The Sterling to Australian Dollar exchange rate was set at 1.65 AUD. The Aussie also hit a two-year high against the US Dollar. The reason for this parabolic rise was the release of the Reserve Bank of Australia (RBA) minutes. The RBA’s board underlined the economy’s positive outlook and surprised the experts by discussing the level of an appropriate neutral interest rate, which was perceived as a sign that the board members are thinking of a gradual rate rise from the current 1.5% to 3.5%.
The Pound slumped against the New Zealand Dollar, trading at 1.78 NZD. The Kiwi suffered on news that inflation in the second quarter of the year was flat, despite the fact that the Reserve Bank of New Zealand had predicted a rise of 0.3%. Annual inflation is at 1.7%, which is below the central bank’s 2% mid-point target. As Westpac’s analysts say, the soft inflation report will reinforce the RBNZ’s view that an interest rate hike is a long way off.