Inflation jumps sharply and pushes exchange rates higher

16 July, 2014

Simon Eastman

Yesterday was another good day for the pound and the UK economy as we saw inflation figures (the cost of goods and services we buy on a monthly basis) released in the morning showing a sharp jump in the rate of inflation here. An expected reading of 1.6 percent was smashed as it came in at 1.9 percent, which is just under the Bank of England’s target rate of 2 percent which it’s been below for the past 7 months. Coupled with the DCLG house price index figure which showed a better than expected increase in the housing market and it bode well for a positive day for sterling.

The reason that sterling benefitted so much was that with inflation at target rate it leaves the door wide open for the Bank to be able to tinker with interest rates, and analyst expectations of seeing a rate hike before the end of this year increased. One ING analyst James Knightley commented, “Given the BoE is targeting inflation in two years’ time, not what it is doing right now, we now favour a rate hike in November.”

Over in Europe the EU and German ZEW economic sentiment which both missed their forecasts, while the German ZEW current situation survey missed by a lot coming in at 61.8 compared to 67. This data, coupled with the strong UK data gave the sterling/euro a decent rally  gaining half a cent immediately and gathering pace over the day to take just over a cent in total, bringing us back to the recent peaks of 2 ½ year highs.

US retail sales were the most key release stateside yesterday which also came under expectations at 0.2 percent compared to 0.6 percent. This poor data gave investor further sentiment towards the stronger pound allowing the further push over the afternoons trading reaching the best levels for sterling/dollar since the recession started back in October 2008.

Today is another day of key data releases for all the major areas, starting with UK unemployment, claimant count and average earnings data. This is followed by EU trade balance with US inflation after lunch. In addition we also have Bank of Canada interest rate and subsequent statement and monetary policy report. These are at 3pm and 3.30pm respectively followed up at 4.15pm by the BoC press conference. We also hear testimony from Janet Yellen and the release of the Fed’s Beige book later this evening.

A very busy day, full of key releases from all over so if you have any transfer to make this week, it could be worth taking advantage of yesterday’s gains and getting in early doors just in case today’s data takes the shine off the golden pound!