Sterling Tumbles as UK Inflation Stagnates
The Pound dropped to a one month-low against the US Dollar and dipped below the €1.10 mark, when the Office for National Statistics (ONS) published data regarding UK inflation, the UK retail price index and the producer prices index. According to the ONS report, inflation in July remained stable at 2.6%, missing the market’s expectations for a rise at 2.7%. The retail price index edged up higher than expected at 3.6%, raising prospects for steep rail fare increases. House prices rose by 4.9% in June, which is the weakest pace recorded since March.
David Davis, the Brexit secretary, said that the UK government will propose a deal with the EU, which will allow the transit of goods across borders to continue under a temporary customs union for a brief period of time. Davis also said that the Brexit divorce bill will not be finalised this year, and insisted that there has been a lot of progress in the talks with the EU negotiators regarding citizens’ rights.
Pound Sterling – UK Markets
Today, Sterling dipped against both the US Dollar and the Euro. The Pound slumped against the US Dollar, losing 0.3% in value, with the exchange rate set at $1.29. The Pound also dropped against the Euro with the exchange rate set at €1.09.
According to data released by the ONS, UK inflation remained stable in July, at 2.6% on a year-to-year basis, while market analysts were expecting a small rise to 2.7%. Inflation in July, on a monthly basis, declined by 0.1% in contrast with the economists’ forecasts that it would remain stable at 0%. Core inflation, which excludes food and energy prices, dropped at 2.4%, on a yearly basis, less than the anticipated 2.5%.
The retail price index rose, in July, by 3.6% on the year, 0.1% more than the 3.5% recorded in June. It should be noted that the retail price index is used by the government to set rail fare increases. The ONS report said that falling fuel prices were offset by rising prices for clothes, utilities and food. A statement from the UK Treasury, commenting on the data, said that the Treasury understands families’ concerns about living costs and supports the view that inflation will likely start falling next year.
US Dollar – US Markets
The US Dollar jumped against the Euro with the exchange rate set at €0.85. The US Dollar Index (DXY) also improved by 0.3%, for a second straight day.
William Dudley, New York’s Fed President, said that “if the economic forecast evolved in line with my expectations…I would be in favour of doing another rate hike later this year.” Dudley is a close ally of the Fed’s President, Janet Yellen, and he is considered one of the most influential members of the US Federal Reserve. Dudley added that he doesn’t think that the expectations of market participants are unreasonable, regarding the start of the unwinding of the Fed’s enormous balance sheet. Dudley also praised the Trump administration for not politicising the monetary policy process.
Later in the day, market analysts are expecting July’s retail sales data to be published. Danske Bank’s economists suggest that the figure won’t deviate significantly from its moderately growing trend. A Barclays’ report said that, according to their estimations, retail sales increased by 0.2%, on a monthly basis, in July.
Euro – European Markets
The Euro slumped against the US Dollar with the exchange rate set at $1.17. The single market currency wasn’t able to resist the US Dollar’s course upwards and wasn’t assisted by good news coming from the German economy.
According to data released by Destatis, German GDP grew by 2.1%, on a year-to-year basis, which is the fastest annual pace recorded since 2014, surpassing analysts’ expectations. The German economy expanded 0.6% in the second quarter of the year, a bit lower than the 0.7% anticipated by economists. Destatis’ report said that positive contributions came from domestic demand, but noted that the increase in imports was considerably larger than the one in exports.
Angela Merkel, the German Chancellor, will certainly be happy with the results as federal parliamentary elections are scheduled for September and polls show that she will retain her position. Analysts at ING suggest that “there is little reason to fear a sudden end in the current economic performance, even though some slowdown from current growth rates seems inevitable.”
Other Currencies – Highlights
The Pound dropped against the Australian Dollar, trading at 1.64 AUD. The minutes of the Reserve Bank of Australia’s (RBA) board meeting, in the beginning of August, refer to “the need to balance risks associated with higher household debt in a low inflation environment.” According to Westpac’s analysts, the RBA accepts that conditions in the housing market and household balance sheets should be carefully monitored. RBA’s board members seemed more confident in the improvement of the labour market, but were cautious about the wage growth outlook.
Sterling dropped against the New Zealand Dollar, trading at 1.77 NZD. New Zealand’s Prime Minister, Bill English, said that he won’t allow the Reserve Bank of New Zealand (RBNZ) to introduce further curbs to home lending. On the contrary, he suggested that the RBNZ should have a plan to remove its loan to value ratio rules (LVRs), which, according to real estate agents, are squeezing buyers out of the housing market. Labour leader, Jacinda Ardern, also said that she would like to see LVRs removed, but wouldn’t like to interfere with the RBNZ’s right to decide.