The Pound picked up strength yesterday, following the news that UK inflation has not yet eased, according to the Consumer Price Index. Inflation is broadly expected to recede back to 2% this year, and it is likely that the Bank of England is waiting for wage growth to rise above 2.5% before raising interest rates. Today, the International Monetary Fund (IMF) has recommended that the UK prioritise improving its productivity performance. The Pound has slipped to a five-week low to the Euro ahead of a speech on Brexit by foreign minister Boris Johnson.

The US Dollar weakened ahead of today’s inflation data due out when the Consumer Price Index (CPI) is released. While inflation is expected to have eased, today’s CPI will be critical since previous hints of rising inflation sparked a global stock market rout. If inflation is unexpectedly stronger, the US Dollar will be likely to benefit by strengthening in expectation of more interest rate hikes by the Federal Reserve.

Pound Sterling – UK Markets

The Pound is lower against the US Dollar, with the exchange rate at $1.38. Sterling is holding steady against the Euro, exchanging at €1.12. The Pound has dropped on concerns about Boris Johnson’s speech today.

The UK’s economic performance in future will depend on increasingly on the ability of firms to raise productivity output per worker, The International Monetary Fund (IMF) has determined. They also noted the implications of a future trade agreement with the EU, saying that the higher the barriers to the cross-border flow of services, goods and workers, the greater the negative impact Brexit would pose.

Wage growth is predicted to rise from 2.6% in 2017 to 3.1%, this year, according to the Bank of England’s regional agent’s report. If inflation drops gradually, as has been forecast, this could signal the end to the squeeze on real earnings later in 2018. Pay growth in consumer services was expected to grow the most, from 3.2% up to 3.9%, while construction is the only sector expected to have no increase in pay settlements this year.

Data released today by banking trade body UK Finance shows that the number of first-time-buyers hit the highest level for a decade, last year. The total of 365,000 buyers marked an increase of 7.4% from the previous year, with the average first-time buyer aged 30 with an income of around £41,000. Separately, UK house prices are rising faster than wage growth or inflation, according to yesterday’s House Price Index released by the Office for National Statistics. The increase was twice as much as the rise in earnings. Prices rose by 5.2%, bringing the average cost of a UK home to £226,760.

US Dollar – US Markets

The Euro is steady 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 89.70.

Today’s US Consumer Price Index (CPI) release is being very closely monitored after concerns about rising US inflation recently set off a global stock market rout. According to ISM prices paid surveys, prices are rising at their highest levels since 2011, so there is a chance that today’s CPI could show inflation strengthening higher than expected. The CPI is expected to slow from 2.1% down to 1.9%, but if it spikes, instead, the US Dollar could rise and the markets could return to volatility.

US Retail Sales for January are expected to slowdown from December’s increase of 0.4%, down to 0.2% for January. A decline of around 2% is expected in auto sales, and economists anticipate similar trends across retail sales. The surge of sales growth seen late in 2017 was unsustainable, and largely due to the need to replace durable goods and cars damaged in hurricanes.

Business optimism spiked by more than expected, according to yesterday’s NFIB Business Optimism Index for January. The expansion to 106.9 marked a 45-year high for the survey as a record number of small businesses indicated they felt it was a good time to expand. The NFIB commented that businesses were responding “to the new management in Washington tackling the biggest concerns of small business owners-high taxes and regulations.”

Euro – European Markets

The Euro is stronger against the Pound, with the exchange rate set higher at £0.89.

Germany’s fourth quarter Gross Domestic Product (GDP) rose 0.6%, meeting expectation of an upswing. Booming exports and increased investment spending fuelled the robust rate of growth. Annual growth of 2.2% marks the strongest performance since 2011. This month German metal workers and engineers won wage deals that may bring 3.9million workers average annual pay raises of over 3% for the next two years. This wage increase is likely to increase consumption, driving further growth.

Eurozone Industrial Production rose by 0.4% month-on-month, beating expectation of a 0.2% increase. Annual gains of 5.2% in 2017 also surpassed expectation of a 4.2% rise. Eurozone GDP rose 2.5%, the fastest growth since a 3.0% rise in 2007. The recent strength of the single market currency is one reason HSBC’s chief European economist has predicted slowing Eurozone growth later this year. Simon Wells also said that “potential growth based on workplace productivity” is around 1 to 1.5%, so growth will slow closer to those rates.

Inflation in Germany is holding steady, according to data released this morning by Eurostat. Germany’s Harmonised Index of Consumer Prices year-on-year for January came in at 1.4%, as expected. The release of price stability compared to the Eurozone helps indicate inflation growth, along with the Consumer Price Index (CPI). The annual CPI reading for January confirms inflation remains at 1.6%, as does the month-on-month figure for January coming in, as expected, at -0.7%.

Other Currencies – Highlights

Sterling has slipped slightly against the Australian Dollar, with the exchange rate at 1.76 AUD. Westpac Consumer Confidence for February slipped from a 4-year high of 105.1 in January, dropping by 2.3% to 102.7, due to the volatility in global share markets.

The Pound is weaker against the New Zealand Dollar, exchanging lower at 1.89 NZD. The Reserve Bank of New Zealand’s Inflation Expectations of annual CPI in two years came in at 2.1% compared to a previous estimate of future inflation by business managers of 2%.

The Pound weakened to the Japanese Yen, trading at 149.01¥. Japan’s GDP slowed to 0.5% in the last quarter of 2017. This missed expectation of an increase to 0.9%, although it marked the eighth consecutive quarter of expansion, due to consumer spending and capital expenditure.