HiFX comments on latest inflation data
Andy Scott, spokesperson for FX advisory services at foreign currency specialists, HiFX, said:
“Sterling fell to a fresh four-month low against the dollar to 1.6635 on Tuesday morning following the release of consumer price inflation data for July which had fallen further than expected. It also fell close to recent two-month lows against the euro at 1.2460. U.K. Consumer prices rose at an annual pace of 1.6% last month and month-on-month they fell 0.3% from 1.9% in June. With inflation comfortably below the Bank of England’s 2% target and wages growing at their slowest annual pace on record, the monetary policy committee are likely to hold off raising rates this year. That certainly seemed to be the message from their quarterly inflation report last week which highlighted the weakness of wage growth as a factor that would determine the timing and pace of rate increases.
“Despite the economy growing at its fastest pace in several years and unemployment falling to its lowest level since the end of 2008, employees are receiving wage increases below the current rate of inflation, resulting in a squeeze on annual earnings in real terms. This indicates that there may indeed be additional slack in the labour market that needs to be used up in order for pay to keep up with inflation and gives the BoE scope to continue to keep rates on hold. Another factor that’s probably winning the argument against raising rates too soon is that some of the world’s major economies either contracted or saw minimal growth in the last quarter. This could weigh somewhat on the UK economy in the coming months, particularly with such a gloomy picture in the eurozone.
“Until Mark Carney undoubtedly shifts expectations again, it looks like we’re back to predictions for the first hike to come around the beginning of the Q2 next year. In the short-term, this will keep the pound under some pressure, having been one of the best performing major currencies this year due in part to interest rate expectations. As these have been dampened, so too has the pound’s rally. But with the economy still growing at a pace even faster than the U.S. there is some scope for it to bounce back, particularly against the euro where the ECB are facing pressure to weaken monetary policy further rather than tighten it. We continue to expect the GBP/EUR rate to move towards 1.30 this year but would expect it to struggle against the U.S. dollar where the policy dynamics are becoming more aligned.”
