Pound sinks to five month low on another UK inflation miss

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23 May 2018

thomasdodds

Sterling fell sharply against its major peers this morning, after UK inflation data for April was revised even lower from the already underwhelming preliminary estimate.

H
eadline inflation for April was revised down to just 2.4% ,year-on-year, from the 2.5% initial estimate, while core inflation also slowed to 2.1% last month. Even though it’s still above the Bank of England’s 2% target, this marks a fairly sharp slowdown from the 3.1% recorded in November, which convinced policymakers to signal that interest rates could be raised on more than one occasion in 2018.

The UK currency experienced a fairly topsy-turvy day of currency trading on Tuesday, with investors seemingly unwilling to commit to large positions in either direction. The Pound had initially rallied after yesterday morning’s appearance of Bank of England members at the latest Inflation Report hearings, with comments striking an upbeat tone. Bank of England Governor, Mark Carney, reiterated that the economic slowdown witnessed in the UK, in the first quarter of the year, was likely temporary and that it would be right to wait for more economic data before deciding on the timing of the next policy move.

Michael Saunders, seen as one of the more hawkish members on the MPC, claimed that the UK labour market will continue to tighten and that he thought unemployment would fall more than the BoE’s base case. It was, however, comments from Gertjan Vlieghe that investors latched onto. Vlieghe noted that rates would likely increase at a faster pace than the market is currently pricing in, one or two 25 basis point hikes per year over the forecast period.

Yet, with policymakers placing a clear emphasis on upcoming data, investors were reluctant to push the Pound higher, instead reacting aggressively to another disappointing data release this morning.

Federal Reserve to release meeting minutes this evening

EUR/USD traders were in a cautious mood yesterday ahead of this evening’s Federal Reserve meeting minutes. The recent rally in the US Dollar paused for a second straight day after an easing back in US Treasury yields, although the rally re-commenced this morning.

Currency traders are keeping an eye out for tonight’s FOMC minutes before committing to positions. With another interest rate hike from the Federal Reserve almost assured, and nearly fully priced in at next month’s meeting, investors will be looking for clues regarding the possibility of a total of four rate increases this year. US economic data leading up to the recent meeting is generally exceeding expectations, we therefore believe that risks to the US Dollar are skewed to the upside going into the minutes.

The Euro’s rally yesterday proved brief, with concerns over Italian politics continuing to loom large over the currency. Italian bond yields rose again, as investors fret over the new government’s likely fiscal policy. An interesting measure of banking fragility, the Italian 5-year CDS, rose to its highest level since October, indicating that the market is now pricing in a greater probability of default in the country.