Pound reverses losses ahead of UK inflation data

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15 January 2020

thomasdodds

Sterling climbed back above the 1.30 level against the US dollar on Tuesday afternoon, reversing much of its sell-off induced by heightened bets in favour of an imminent Bank of England interest rate cut.

T
he pound was hammered at the beginning of the week after three members on the bank’s rate-setting committee suggested that lower rates may be needed as soon as this month. One of the two members on the bank’s MPC that already voted in favour of more stimulus at the end of 2019, Michael Saunders, this morning also reiterated his view that rates needed to be lowered in the UK. Saunders stated ‘with limited monetary policy space, risk management considerations favour a relatively prompt and aggressive response to downside risks at present’. He noted both ‘sluggish’ economic growth and ‘subdued’ inflation as his rationale for lower rates.

This morning’s UK inflation data will now be key. The headline number continued to undershoot the Bank of England’s 2% target in November, coming in at just 1.5%. Investors are expecting an unchanged reading for December, although another downside surprise here would heap a great deal of pressure on the BoE to at the very least consider the possibility of lower rates at the end of the month.

US and China set to sign ‘phase 1’ trade deal

EUR/USD ended London trading yesterday roughly where it started, despite briefly making a move towards the 1.11 mark.

With not too much in the way of major political or economic developments for investors to digest on Tuesday, currency traders were focusing fully on this afternoon’s signing of the US-China phase one trade deal. The signing is expected to take place in Washington at around 16:30 UK time this afternoon (17:30 CET). While tariffs on many billions of dollars of goods will remain in place, the signing of the deal is an encouraging step in the right direction to a full-blown trade agreement. While we certainly don’t expect a reaction in the currency markets to this afternoon’s news, given it is already priced in, investors will breathe a sigh of relief that at least some of the short-term trade risk is alleviated.

As mentioned, there wasn’t too much market moving data out yesterday, with the US inflation numbers for December coming in right in line with expectations. The headline number picked up as predicted to 2.3% year-on-year, now comfortably above the Fed’s 2% inflation target. This significantly lessens the need for additional rate cuts in the US this year, in our view.

Next up will be this morning’s industrial production numbers out of the Eurozone. We will be looking for signs that the improvement witnessed recently in the bloc’s sentiment numbers is also being reflected in hard data.