Inflation Knocks The Pound

16 August, 2017

Simon Eastman

With Ascension Day being celebrated in much of Europe with bank holidays and no EU data releases, the pound had the opportunity to make back some of the recent losses it had felt.

Alas, UK inflation had other ideas, with an expectation that it would rise again from the drop last month, this would have led to some sterling strength as higher inflation would bring interest rate rises back into play for the Bank of England. The fact it stayed the same, and lower than the expectation was sterling negative as it means the BoE still have little reason to believe raising interest rates would be the right thing to do for the economy. As a result of the release, the pound dropped half a cent against both the euro and the US Dollar but continued to lose ground over the rest of the trading day as sentiment with investors remained away from Sterling.

We are pushing new boundaries on sterling/euro having dipped below the key 1.10 level and remained there for a trading session. Previously it’s been tested a few times this past week but not retained below, leaving it open for further downside having broken such a key resistance floor. With EU markets back open today after the trading holiday and with the key GDP figure released at 10 am this morning if the level comes out better than expected, we may see fresh lows tested. Anyone with a euro requirement still to make might be prudent to cut losses and get the trade booked sooner rather than later, as with fresh lows already hit and parity being widely bandied around by investment houses and banks alike in their forecasts, waiting may prove costly. As an example of waiting, buying €200,000 at the start of the month would’ve cost £6500 less than it does now – a significant increase by anyone’s standards!

In addition to EU GDP we also have UK unemployment and average earnings figures released at 9.30am, where we expect no change, then later on in the day, the US release some house build stats after lunch followed this evening by the minutes from the last FOMC meeting, which may give further insight into their current interest rate stance.