Inflation data slows Pound’s Rise
January 17th: Highlights
- Sterling remains at highest level since June 2016
- German coalition concerns hit Euro
- Dollar continues to suffer
December Inflation Data provides relief to MPC
The rise in the value of Sterling versus the dollar has led to a significant fall in the producer price data which indicates the rise (or fall) in the cost of goods at the factory gate and is a precursor of future consumer prices. The headline rate of inflation in December was 3%, down from 3.1% in November. Producer prices were at 4.9% versus an analyst’s expectation of 5.4% and a November figure of 7.3%.
The pound closed virtually unchanged on the day at 1.3795 having made a high of 1.3807. Overnight, it has rallied a little further, to 1.3837, but has fallen back below 1.3800, last trading at 1.3777 (6.30GMT).
With retail sales data due of Friday and the employment report next week, Sterling is likely to stay in the focus of traders’ minds as the economy dominates and Brexit takes a back seat, for now.
Euro corrects as Merkel Struggles with Coalition
While this setback could prove to be temporary, were the vote in Berlin to be repeated across the country, new elections would be necessary which would bring further uncertainty following the rise in support for the ultra-right wing AfD in September’s vote.
The Euro slowed its recent rise versus the dollar yesterday, retreating to a low of 1.2195 before rallying to close virtually unchanged at 1.2266. It has briefly traded above 1.2300 overnight before a bout of profit taking drove it back to a low of 1.2245. This remains close to the highest level for the single currency since mid-December 2014.
Today’s release of inflation data for the entire Eurozone follows yesterday’s report for Germany. In December price rises in the Eurozone’s largest economy grew by 1.6%, unchanged from November. Analysts expect another unchanged result for the whole region with inflation remaining at a benign 1.4% relieving the pressure on the ECB a little. Should the data be in line, this should have little effect on the Euro’s continued rise.
Dollar woes continue
The weakness in the dollar, driven primarily by uncertainty over the future path and pace of interest rate increases has coincided with (irrational) optimism over Brexit which has pushed Sterling higher and some (so far, also irrational) expectation of a tapering of the ECB’s Asset Purchase Scheme earlier than had previously been expected.
With the new Fed Chairman Jerome Powell set to take over from Janet Yellen on February 4th even though he hasn’t, so far, been confirmed by the Senate, uncertainty over how the FOMC will be made up will bring further downward pressure for the dollar which has been primarily been supported by a widening of the interest rate differential between the greenback and its G7 partners.
There is little in the way of fresh economic data due out in the U.S. before Jan. 26th when the first cut of Q4 GDP will be released. Any significant variance from the 3.2% seen in Q3 could either halt the slide or add to its velocity.
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.”