Inflation Surprise Drives Pound
Morning mid-market rates – The majors
February 14th: Highlights
- January rise justifies BoE concern
- Dollar falls on inflation fears
- Euro rise continues as growth data looms
Inflation remains at 3%
The concern will be that any rate hike will see business investment, which is extremely weak due to the uncertainty over what Brexit will do to order books, collapse. There is a fine balance to be struck even in “normal times” between applying sufficient stimulus to allow the economy to grow without pushing wages and prices higher. The possibility of a rate hike in May grew following the release of the data although any fall in the February data will see hawkish sentiment evaporate.
The pound rose against the dollar but stayed in a relatively narrow trading range. It reached 1.3925 before dropping back to close at 1.3886. It has stayed in a tight range overnight remaining close to the 1.3900 level. It fell against a stronger Euro making a low of 1.1223 and closing at .1238.
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Inflation data due in US
Traders are nervous about today’s data following the rise in the dollar mostly attributed to risk aversion as equity markets correct but also due to the likelihood of a series of rate hikes by the Federal Reserve this year. Headline inflation, ex food and energy, is expected to have risen by 1.7% in January down from 1.8% in December and still shy of the 2% target.
Jerome Powell the new Fed. Chair is known to favour a reactive stance to rate hikes so any fall in the rate of price rises is likely to see the next hike deferred. So far, Powell has concentrated on the risks associated with volatility in equity markets and hasn’t yet made any comment on the Fed’s outlook for interest rates.
The dollar index remains in a narrow range following last week’s rally. It reached 89.50 yesterday and has remained close to the same level overnight. Retail sales data will also be released today with an unchanged 0.4% increase expected.
Gradual Euro climb continues
The Euro makes up a little over 57% of the dollar index but the dollar only makes up 13.6% of its Euro equivalent. This reflects the relative trade positions of the two countries and demonstrates why the Chinese currency is the largest constituent part of the “Eurobasket” at 23.3%.
By this measure the single currency has only rallied by marginally less than 7% in the past twelve months rendering its rise against the dollar less significant to Mario Draghi and his reluctance to change monetary policy.
The Euro reached 1.2372 yesterday and has reached 1.2393 overnight. It has drifted back below the resistance at 1.2380 and it is unlikely to push through and hold above that level until after the German inflation data which is expected to show continued strength in the region’s largest economy.
The pound has been steady overnight versus both the dollar and Euro, staying within yesterday’s ranges
Have a great day!
About Alan Hill
Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”