Soft CPI Eases BoE’s Task
City Index August 19, 2014 4:41 PM
<p>Falling oil prices and a strong sterling were partly to blame for the renewed slowdown in UK inflation, as consumer prices slowed to 1.6% y/y […]</p>
Falling oil prices and a strong sterling were partly to blame for the renewed slowdown in UK inflation, as consumer prices slowed to 1.6% y/y in July, further dropping below the Bank of England’s 2.0% target. Removing volatile energy and food prices, inflation also slowed, reaching 1.8% from 2.0% y/y. The benign inflation outlook was also highlighted by broad declines in producer input and output prices, with the former falling 7.3% y/y, its biggest decline in four years. A major culprit was the 6% drop in Brent (biggest monthly decline in 15 months), which helped trigger a 6.1% fall in prices of petroleum output prices.
Meanwhile, the ONS reported a 10.2% annual y/y June increase in house prices from May’s 10.4%, but more recent data from other providers indicate that the pace of increase will slow further in coming months.
The CPI figures sustain additional pressure on sterling and gilt yields, following last week’s release of UK Q2 earnings growth, showing the first contraction in four years. The latest inflation data as well as the earnings figures couldn’t have come at a better time for the Bank of England’s MPC members wishing to dampen expectations of early rate hikes. Bond markets have scaled down expectations for a 2014 interest rate hike. That is exactly what was needed for rate hike chatter to be toned down following last week’s release of the sixth consecutive monthly decline in the ILO unemployment rate to fresh six-year lows of 6.4%.
The data also means that Wednesday’s release of the minutes from this month’s MPC meeting may not carry much weight from the more hawkish members of the Committee. The one-two punch of “earnings-CPI” to the hawks is more likely to mean a temporary pullback in GBP rather than the start of a new downtrend.
Part of sterling’s 12-month rally is attributed to recent advance in rate hike expectations, but a larger part was due to the accelerating pace of improvement in GDP and business surveys (services, manufacturing and construction). Although rate hike implications will recede for now, there is no sign of a halt in business expansion. The current 1.6650s level in GBP/USD is a key confluence support of both the 200-day and month moving averages. But we expect sterling to deepen its retreat beyond the current level ahead of uncertainty stemming from Scotland’s independence referendum, which will be sufficient reason for an additional 2.0% decline in GBP/USD towards $1.6450s, coinciding with the 55-week moving average. The current 75% odds that Scotland will fail to obtain independence should fuel a knee-jerk reaction in the pound, but the implications for further Scottish devolution may raise uncertainties into next year’s general elections. Negative politics and positive economics should boost buying of GBP dips near $1.6400. Meanwhile, preferred GBP shorts are GBP/AUD towards 1.7500 and 1.8050 in GBP/CAD.
GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.