UK inflation this morning sets the tone for the Bank of England

13 September, 2016

Tom Arnold

The last week has seen somewhat of a turnaround in Sterling’s fortunes, with the previously improving Pound taking multi cent losses against both the Euro and the US Dollar. This was in part due to the ECB’s announcement last week that they were holding off on additional stimulus and also as a result of some negative manufacturing numbers. The UK’s data had been fairly robust until that point, and the Pound had been clawing back some of its post-Brexit-vote gains, but this was halted last week, and with Brexit negotiation planning now to the fore with the government we could be set for a testing time for Sterling.

We have a very busy week on the markets in front of us – not much to report from yesterday, but today things really start to ramp up. We have already seen German and Spanish CPI inflation numbers come out – all exactly in line with expectations. Next up is the UK’s inflation numbers, with CPI, PPI and RPI numbers all due out at 9.30am. There are then German and European economic sentiment surveys, European unemployment data and a speech from Mario Draghi all at 10am. This afternoon sees some minor data from the US, and overnight tonight we have current account figures from New Zealand.

Expectations are that the critical UK CPI figure will have slightly ticked up from 0.6% seen last month to 0.7%. Inflation is under the spotlight at present with the Bank of England’s interest rate policy at the forefront of potential major market factors. Another interest rate cut is widely expected in the coming months, and if inflation is relatively stable then there is room for this, but if inflation is on the rise, then the Bank may have to rethink this policy, as lower interest rates generally lead to more spending, which is a driver for higher inflation, and the Bank would not want inflation to get out of control or to exceed the 2% target. If inflation does remain stable or alternatively even drop off a little then you could see the Pound drop off further as this would give the room for an interest rate cut, and lower interest rates generally lead to a weaker currency.

If you have an upcoming currency requirement then booking your rate ahead of Thursday’s Bank of England meeting, could be a very good plan. If inflation stays stable today, as expected, then it is entirely possible that we could see an interest rate cut later this week, which would very likely see your Pounds buy you much less of whichever currency you need. Make sure you stay in close contact with your CI account manager around these announcements.