HiFX comments on CPI data
Andy Scott, associate director of FX advisory services at foreign currency specialists, HIFX comments on CPI data.
“December’s CPI figure was much lower than expected, showing that prices are rising at their slowest pace for 14 years predominantly due to the drop of over 50% in the price of oil, which has fallen even further in 2015 so far.
“This is welcome news as wages are now growing comfortably above the rate at which everyday goods are rising by. The latest figures for October showed wages rising 1.6% annually, which is still soft compared against historical data and considering the economy has been growing by around 3%. However it does mean that real wages (stripping out the effect of inflation) are now rising, leaving us all slightly better off.
“From an economic point of view, the timings of the reversal of real wages falling – as they had from 2009-2013 is very convenient as there are some signs that the economy is cooling. With consumers now slightly better off, there’s a good chance spend on goods and services will increase, supporting domestic demand.
“The prospects of the Bank of England raising rates in the current environment where global price growth is slowing remarkably and in some cases, prices are actually falling, are very slim indeed. When you strip out the volatile energy component from the data, since central bank’s really have no control over the global price of oil, the rate did actually rise to 1.3%. However this is still only just above half the BoE’s 2% target rate and certainly doesn’t require taming. Sterling’s reaction was relatively muted, falling by less than half a percent against the dollar and the euro before recovering some ground. This to us indicates that the market has already largely discounted a rate hike from the BoE this year since CPI is the main gauge the Bank uses to determine its monetary policy decisions.
“With Carney and the majority of the MPC holding policy steady, the sterling’s direction in the months ahead will likely be heavily influenced by what other central banks do. With the ECB likely to announce Q.E. either next Thursday or at their meeting in March, we expect to see the euro remain weak and for GBP/EUR to finally break through the 1.30 level. The FOMC have indicated a rate hike is coming – possibly by the summer, but markets are now less convinced that it will happen then. If this view becomes more widely held, the dollar strength that we’ve seen over the past six months would likely start to wane and GBP/USD should bounce back from the recent lows around 1.50.”
