UK inflation grabbed all the headlines yesterday with figures confirming a forecasted drop

14 August, 2013

Rob Bastin

UK inflation grabbed all the headlines yesterday with figures confirming a forecasted drop from 2.9% to 2.8% on the year on year Consumer Price Index. Retail price figures also came down slightly from 3.3% to 3.1%. As the trading day went on the markets slowly reacted to this news in a positive fashion, with the pound pushing higher against most major currencies.

GBP/EUR rates saw the most significant move yesterday, pushing up to a 6 week high, and more importantly pushing through a key level of resistance that has seen rates trade sideways for the last 5 days. Even more importantly this move signifies the first failure of the negative trend that has dragged rates lower in the last 4 months. This does not mean that we should expect rates to immediately improve, but it does mean that we may have now seen the worst and better exchange rates could be on the horizon. Before a new positive trend can be confirmed, we must first see a drop in rates so those with a more immediate requirement to send money abroad would still be wise to take advantage of the current highs whilst they are available.

Elsewhere yesterday Euro-zone industrial production saw a better than expected growth whilst US Retail Sales were just short of expectations and some 0.4% down from last month.

Today the focus is once again on the UK and the Bank of England. At 9:30am we will get the minutes from the interest decision 2 weeks ago, and this is widely expected to be a non event with votes expected to be unanimous once again. At the same time we will also get the latest unemployment data for the UK which now carries far greater importance than ever before since Mark Carney directly linked the unemployment rate to the timing of any interest rate hike in the future. This may now prove to be the main event of the month moving forward as the markets look for any indications of the headline rate coming down from 7.8% to 7% in the future. We must however remain cautious that any shortfall in figures could now have twice the negative impact that they would have previously.

At 10:00am the Euro-zone will also announce their latest GDP figures, adding to the potential volatility on GBP/EUR rates tomorrow.

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