Home Daily Commentaries UK inflation drops, but misses target

UK inflation drops, but misses target

Daily Currency Update

UK’s annual headline inflation dropped to 6.8% in July from 7.9% the prior month, data showed this morning. Falling gas and electricity prices were the biggest drivers behind the drop in inflation, with food price inflation also easing. A fall in inflation will be music to the Bank of England’s ears, but the release still leaves inflation more than three times higher than its 2% target. This comes after news Tuesday that the basic wage in Britain rose 7.8% in June, a new record growth rate, adding to long-term inflation pressures. This has increased bets that the Bank of England will look to extend their 14 back-to-back interest rate increases and in turn supported Sterling gains this morning. GBP/USD has just broken 1.2750 at the time of writing, jumping from being under 1.2700 overnight. GBP/EUR has been on the rise since midday yesterday, going from 1.1620 up to 1.1670.

European flash GDP quarter-on-quarter is due later this morning, with figures expected to show little growth of 0.2% and industrial productions data likely to be negative. The key release for today comes from the US with FOMC meeting minutes. Market participants will be waiting on whether the FED will show signs of readiness to hike the rate further prior to their policy pivot. If hikes are likely, the USD could gain further.

Key Movers

The US dollar gained against the GBP and EUR yesterday afternoon, off the back of positive US data. US Retail Sales increased by 0.7% in July, higher than the expected 0.4%, and Core Retail Sales grew by 1.0% compared to the expected 0.4%. These gains have been short-lived as UK CPI data has bolstered the predictions for further interest rate hikes. Although a fall in the previous 7.9% was seen, the figure missed the 6.8% predicted and three and a half times over the target of 2%. It seems a cautious mood among market participants ahead of the Eurozone flash GDP and US FOMC meeting minutes are also the reason for the US dollar weakness. EUR/USD sits at 1.0930 after testing a fall below 1.0900 overnight. AUD/USD is back up to 0.6475 from 0.6435 and GBP/USD is back above 1.2750.

Expected Ranges

  • GBP/USD: 1.2620 - 1.2860 ▲
  • GBP/EUR: 1.1550 - 1.1750 ▲
  • GBP/AUD: 1.5910 - 1.9850 ▲
  • EUR/USD: 1.0860 - 1.0990 ▲