Sterling continued its poor run in Q3 following a decidedly average CPI report that showed a limited pull through of price pressures in the UK. CPI fell to 1.6% from 1.9% in June against an expectation of 1.8%. June’s inflation figure ticked higher to 1.9% as retailers held off on price discounts a little longer than usual but the decision to cut apparel and shoe prices through the month of July has taken the price basket lower and further under control.
For the majority of the Bank of England’s Monetary Policy Committee this figure will come as a bit of a relief. No policymaker would want to be caught between the rock and the hard place of a decision between heading off an inflation number running higher and a wage picture that is seeing pay fall in both real and nominal terms. The unemployment rate can easily come lower before inflation pressures pick up and with that inflation outlook we can easily see the Bank of England holding off on a normalisation of monetary policy into Q1 of next year.
Sterling fell to the lowest level in four months versus the USD in the aftermath and the implied probability of a rate hike by Christmas 2014 as viewed by swap markets fell to 23.0% from 24.1% previously.
Today’s Bank of England minutes would typically not be too much of an event. Coming a week after an inflation report that telegraphed the Monetary Policy Committee’s focus on wages, the surprise factor is significantly lowered. While we are looking for dissent from some members of the MPC – namely Martin Weale – in the coming quarter, we believe it to be unlikely that they have decided to vote against Mark Carney’s forward guidance plan just yet. A 9-0 vote would be a slight sterling negative this morning as Q4 rate hike expectations are further priced out.
Consumer prices in the US crept 0.1% higher in July, the smallest rise in five months. Most of the downward pressure came from energy prices which fell 0.3% on the month. This mirrors the 5% decline that we have seen in oil prices through the past month despite recent geopolitical incidents. As it stands at the moment, with CPI running at 2.0% YoY, there is little evidence that the inflation picture in the United States is strong enough to nudge the Federal Reserve into changing its policy outlook soon. Market expectations of when the Federal Reserve will make the first move away from its Zero Interest Rate Policy (ZIRP) still sit over a year from now. Any clue that price increases are set to quicken will bring the front-end of this curve higher and the dollar with it.
We can expect some hawkish language in tonight’s FOMC minutes too, following changes to the Fed’s language about the downside risks to the US economy. Wednesday’s minutes may give us a quick shot of what Yellen will focus on during Friday’s speech but we expect that the dollar’s path will not be swayed too far.
Geopolitical risks have picked up overnight following the expiration of a truce between Israel and Gaza and the murder of an American journalist by a member of IS. Obama’s reaction to the second will define haven currency movements in the coming sessions.
