Shop prices pause keeps cap on sterling for now
Sterling’s extension on Tuesday of the down leg that commenced on Monday (cable traded down 77 pips and verged on $1.24 at the time of writing) was largely a reaction to softer than expected CPI.
Sterling’s extension on Tuesday of the down leg that commenced on Monday (cable traded down 77 pips and verged on $1.24 at the time of writing) was largely a reaction to softer than expected CPI.
Questioning of Bank of England Governor Carney and other UK rate setters by The Treasury Committee largely covered ground which, from a markets point of view, was already well trodden.
Whilst broadly interesting, the discussion did nothing to negate bearish perceptions of the U.K.’s latest inflation update which saw a widening divergence between consumer and factory prices.
Sterling’s extension of the down leg that commenced on Monday (cable traded down 77 pips and verged on $1.24 at the time of writing) was largely a reaction to softer than expected CPI.
The headline +0.9% year-to-year print, when +1.1% was forecast is being read as tilt towards the more dovish view of the inflationary outlook among the BoE’s MPC.
As ever, we need to remember that one counter-trend reading is of only marginal importance in itself.
Nevertheless, the extension of the pound’s softer performance this week is rational in view of the rapid snap-back in implied probability of a Federal Reserve rate rise by 25 basis points and slightly reduced odds for anti-inflationary U.K. tightening.
As for the figures themselves, on the consumer side, continued artefacts from the summer’s economic and political mayhem can’t be ruled out.
However, stronger than forecast producer prices can’t be downplayed in the same way, with such eye-catching records as October’s 12.2% input price acceleration, the biggest annual increase since 2011.
The tone of questions at the Inflation Hearings, if not their content, was charged with commensurate anxiety, partly to do with the uncontrolled influx of inflation itself.
The rate of factory gate price rises underlines how difficult it is to predict when retailers and stockists will have to release the lid on wholesale price pressure and, in turn, what the consumer impact and reaction will be.
Eventually, price rises will inevitably be bullish for the pound, but Tuesday’s inflation snapshot confirms ambivalence and uncertainty in the outlook for prices, even if the lag is keeping a cap on sterling, for now.
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