UK inflation takes back seat to Brexit
The pound dipped slightly versus the dollar as UK inflation fell below the BoE’s 2% target for the first time in two years. Headline inflation decelerated to 1.8% year on year in January, down from 2.1% the previous month. Easing oil prices and a cap on energy bills kept inflation in check, even as wage growth accelerated. However, the pound’s reaction to weaker than forecast inflation was relatively muted; at the end of the day data is taking a back seat to Brexit developments.
Dollar strengthens as US inflation beats expectations
A Brexit inspired spike lifted the pound to a session high of US$1.2959 before stronger than forecast US inflation pulled the pair back to the flatline. US inflation was expected to decelerate to 1.5% in January, down from 1.9%. A print of 1.6% was sufficient to put the wind back in the sails of the dollar’s recent rally. The pair moved towards the end of the European session around the $1.29 handle.
Whether sterling can hold this level will depend on Brexit developments tomorrow as Parliament is due to debate and vote on amendments to the Brexit process. However, this is by no means last chance saloon as Theresa May announced there will be a further vote on 27th February.
Euro tanks on more weak data
The dollar’s strength was even more noticeable versus euro weakness after the bloc’s industrial production declined for a second straight month. Eurozone industrial production contracted by -0.9% month on month in January, following a -1.7% fall in December. The euro fell back through support at $1.13 to a low of $1.280.
Traders will now look cautiously ahead to tomorrow’s Eurozone and German GDP. The eurozone economy and particularly German the economy are clearly showing signs of stress amid Brexit and slowing global growth. German growth is expected to be just 0.1% after contracting in the previous quarter.