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Inflation figures drag on sterling.

By Hamish Muress

The pound suffered yesterday. GBP/USD hit lows not seen since September 2017 off the back of weaker than expected core inflation figures which in itself hit 15 month lows. So what drove sterling’s move, surely weaker inflation figures are better for UK households? Well firstly the market was caught slightly unaware by the drop in the total CPI figure to 2.4% despite petrol prices hitting 4 year highs (maybe Elon Musk is rolling out more Model 3’s than analysts have realized). Secondly and more importantly the drop in inflation relieves some of the pressure on the Bank of England to raise their interest rates next month to 0.75% with market implied probabilities dropping back to 73% from 84%. This author has long maintained that it would be more appropriate for the central bank to raise rates in February 2019 once Brexit details have become more clear but with GDP figures expected to bounce back the Bank of England may be nudged over the edge.

Watch out today for retail sales figures for the UK, a number that has proved very volatile recently, as well as the ongoing Brexit battle.

It was round two for Federal Reserve Chair Jerome Powell as he was testifying in front of the House Financial Services Committee. Repeating a lot of what he said the previous day to the Senate there weren’t too many surprises for the markets and if anything it just reiterated what he was thinking; economic consequences will be felt due to the trade wars (There were reports yesterday from White House advisor Larry Kudlow that trade talks with China had slumped).

It is set to be a quieter day for the US markets today with just the release of the Philly Fed Manufacturing Index this afternoon. The questions that people will be asking is whether manufacturing levels has fallen again and whether EUR/USD can drop through 1.16?

It’s been quiet of late for the Euro with only revisions for core inflation levels being revised lower which isn’t great news for the ECB. Since the back end of last month the pound’s gains that it made against the Euro that it made in March and April have slowly been eroded away and we now approach the 1.12 level, a level not seen in 19 weeks.

The Aussie dollar has benefited overnight off the back of much better than expected employment figures. Around 17,000 jobs were expected to be added to the economy but instead nearly 51,000 were added instead. The Aussie popped against both the USD and GBP and whilst some of the gains have been unwound optimism for the time being has returned to the currency.

The Canadian dollar gained around a cent against its US counterpart yesterday, bouncing off 1.3165 before coming back as the market digested Jerome Powell’s comments. It will be a big day tomorrow with the release of July’s inflation numbers particularly given the fact that two out of the last 3 readings have failed to meet forecasts.

GBP/NZD bounced off 1.9200 yesterday off the back of the weaker than expected inflation numbers from the UK. Unlike the USD though the lows weren’t quite as drastic and we only have to go back to the end of June to these levels again.