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Sterling stabilises as UK inflation rises to 2.5%

By Jake Trask

UK CPI rose slightly to 2.5% y/y latest figures showed yesterday. The uptick was predicted by the markets and sterling barely moved on the back of the release. The report cited rising prices for computer games and transport fares as adding the main upward pressure to the basket of goods CPI is calculated against. At the same time PPI was released showing goods and raw materials purchased by manufacturers rose 0.5% m/m higher than the 0.1% expected. This pipeline pressure could add some support to inflation in the medium term if it is passed on to consumers. Today we have UK Retail Sales numbers m/m due at 9:30am with a 0.2% increase priced in. GBP/USD continues to hover around the 1.27 handle as it has been since Tuesday afternoon.

US Retail Sales were published yesterday afternoon showing a stronger than expected performance from American stores. The overall level rose 0.5% and the core reading (which excludes car sales) rose 0.6% between June and July. The American economy appears to be in rude health at the moment, apparently unaffected by the trade wars imposed by Donald Trump earlier in the year. Events in Turkey are still the markets main focus however some level of confidence is being restored in the lira with USD/TRY currently trading at 5.82 when it had peaked above 7 two days earlier.

The euro remains under pressure this morning with EUR/USD still trading under the 1.14 handle at present. It has staged a recover of sorts over the past 24 hours as it looked close to dropping below 1.13 yesterday afternoon. Risk of contagion to European banks from the economic crisis in Turkey continues to hang over the shared currency and looks likely to be a headwind for some time to come. GBP/EUR trades at 1.1180 ahead of another quiet day from the EZ.

AUD/USD managed to hold above .72 yesterday as a slight improvement in sentiment re: Turkey came to the commodity currencies aid. AUD/USD is currently at .7260 however the Aussie is vulnerable at the moment to events from Turkey and news re: trade between US and China and remains near its lowest level since Jan 2017. Assisting the local dollars recovery overnight was an unexpected drop in unemployment to 5.3% from 5.4%. GBP/AUD trades at 1.7490.

USD/CAD rallied through 1.31 aided by a much bigger surplus of US oil reserves. Latest numbers from the Energy Information Administration showed there was an increase in inventory of 6.8m barrels rather than a fall of -2.6m that was priced in to the market. Brent dropped from around $71.3b to $70.3b on the news dragging the loonie with it. This week’s big event from Canada is tomorrows CPI reading with a monthly rise of 0.1% expected. GBP/CAD trades at 1.6680.

A calming of market tensions re: Turkey has aided a recovery of sorts of the commodity currencies with NZD/USD rising from 0.6545 to close to 0.66 over the past 24 hours. There is little news from NZ for the rest of the week so the current headline external factors will dictate the Kiwis moves. GBP/NZD trades at 1.9300.