UK Inflation Holds Steady
The Pound is stronger after today’s report by the Office for National Statistics (ONS) shows that UK inflation has not eased lower, as had been anticipated. The Consumer Price Index had been expected to show that inflation had eased down from 3% in December to 2.9% in January, however, prices remain higher than they were a year ago. The data makes it more likely that the Bank of England will raise interest rates as early as May, which boosted the Pound.
The US Dollar is weaker on concerns regarding the widening US deficit after president Donald Trump unveiled his infrastructure blueprint which will rely on local governments to fund $1.3trillion in improvements to roads and bridges. Critics of the plan, which had been an election promise, call it a “scam” because it will increase local taxes and fees for Americans. Also, the 2019 budget plan calls for sharp cuts to welfare spending, hiking military spending and increasing the deficit to record high levels.
Pound Sterling – UK Markets
The Pound is higher against the US Dollar, with the exchange rate at $1.39. Sterling also rose against the Euro, exchanging higher today at €1.12.
The Bank of England is more likely to raise interest rates in May, since inflation in January remained stubbornly at 3%. Today’s report by the Office for National Statistics, shows that food and petrol prices fell but were offset by the higher cost of attractions such as zoos and gardens. Core inflation rose to 2.7%, year-on-year for January, higher than the expected figure of 2.6%. On a monthly basis, inflation growth slowed sharply, at -0.5% last month, after a figure of +0.4% for December.
With inflation still at 3% and wages rising by only 2.4%, British workers are suffering a cost of living squeeze, with real wages shrinking by as much as 0.6%. Trades Union Congress (TUC) has called on the government to raise the minimum wage and boost infrastructure spending to improve living standards.
Yesterday, comments by Bank of England (BoE) Monetary Policy Committee (MPC) members Gertjan Vlieghe and Ian McCafferty suggested the BoE considers it appropriate to raise interest rates in the near future because of strong growth and above target rate inflation. MPC Member Vlieghe noted that tightening labour markets are steadily increasing wage growth. MPC Member McCafferty suggested that rates will move up slightly faster than BoE had previously considered, saying it was too early to determine if the BoE will hike interest rates in May.
US Dollar – US Markets
The Euro has risen against the US Dollar, exchanging at $1.23. The US Dollar Index (DXY), which measures the strength of the Dollar against six major competitor currencies, is down, at 89.85.
The US Dollar has weakened after details of the US government’s 2019 budget revealed the US federal deficit would rise to over $1trillion next year. The $4.4 trillion budget plan cuts funding to Medicare providers by nearly 6%, or around $500billion. It also reduces funding for programmes that benefit the poor and middleclass including food stamps, housing subsidies and student loans.
President Donald Trump’s infrastructure plan faces steep hurdles that make securing Congressional approval unlikely. Democrats requested $1trillion in Federal funding to be spent over a decade, but Trump has proposed just $200billion. The proposal shifts the established process of the Federal government spending 80% on infrastructure to local governments contributing that amount. The plan suggests that states add toll roads as a means to pay for the projects, with the government increasing petrol tax to offset its own expenses.
While speaking at yesterday’s infrastructure initiative event, Trump said he would push for a “reciprocal tax” against countries that levy tariffs on US products. Trump said he would charge allies, saying: “some of them are so-called allies but they’re not allies on trade.” Administration official did not specify how this would be structured, or if rates would be raised to the same levels as those charged by other major trading partners.
Euro – European Markets
The Euro is slipping against the Pound, with the exchange rate set at £0.88.
Employment in the EU continued to rise more strongly than expected in the third quarter of 2017, according to the latest European Commission press release. The Quarterly Review on Employment and Social Developments in Europe said that EU employment reached its highest level ever recorded with more than 236million people employed. Compared to the previous year, EU employment rose by 1.7%, with an additional 4 million people employed, 2.7million of which were working in the euro area.
Surging investment in Poland is a sign that the economy is not affected by the country’s political dispute with EU, according to Investment and Development minister Jerzy Kwiecinski. The minister said that the economy probably expanded by about 5% in the last quarter of 2017, compared to the same period a year earlier, which is the fastest rate of growth in six years. Polish premier Mateusz Morawiecki reshuffled his cabinet last month, in an attempt to improve relations with EU. The EU has threatened to impose political sanctions on Poland for an erosion of democratic values under the ruling Law and Justice party.
Other Currencies – Highlights
Sterling has climbed higher against the Australian Dollar, with the exchange rate at 1.76 AUD. National Australia Bank’s Business Conditions and Business Confidence for January surpassed expectations, coming in at 19 and 12, respectively.
The Pound is stronger against the New Zealand Dollar, exchanging at 1.90 NZD. New Zealand’s Treasury reported that it had taken in $600million more than it expected in tax revenue in the second half of 2017. Core Crown tax revenue totalled $37.2billion for the period.
The Pound has lost ground to the Japanese Yen, trading at 149.69¥. Japanese policymakers have signalled that Bank of Japan governor Haruhiko Kuroda will be reappointed for a rare second term when his current term expires in April. Kuroda deployed Japan’s huge asset-buying programme which introduced negative interest rates in effort to increase inflation.