Sterling buffeted by Brexit news, UK inflation spike

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20 September 2018

thomasdodds

Wednesday proved to be an especially volatile day for the Pound, buffeted by Brexit news and a surprise inflation number.

S
terling initially rallied by almost half a percent to back above the 1.32 level against the US Dollar after the latest inflation data for August massively overshot expectations. The headline rate of inflation jumped to 2.7%, its highest level in six months and well above the 2.4% consensus.

There was also a sharp increase in the rate of core inflation, which strips out volatile food and energy components. The measure rose back above the Bank of England’s target level for the first time since May, increased to 2.1% from July’s 1.9%. This is a fairly significant upward revision from the initial estimate that reaffirms our view that the BoE will raise interest rates at some point in the second quarter of 2019, providing a deal on Brexit is secured before the end of the year.

On the topic of Brexit, a report released from The Times yesterday that stated Theresa May would reject an improved offer from the EU on the Irish border caused a sharp downward move in the UK currency. These losses were, however, reversed again this morning after cabinet office minister David Lidington stated that Britain was more than 85% of the way to agreeing a deal with the EU. We remain confident that a deal will be agreed at either the October summit or an emergency summit in November, which would provide scope for additional gains in the Pound.

Norges Bank raises rates, Japan and Switzerland stand pat

Elsewhere in the currency markets, the Bank of Japan and Swiss National Bank both kept their monetary policy steady on Wednesday and Thursday respectively.

We did, however, see the first interest rate hike in the Scandinavian region in a number of years after Norway’s central bank, Norges Bank, raised interest rates by 25 basis points to 0.75%, as expected. With a number of G10 central bank’s now either in the process of hiking, or signalling that higher interest rates could be on the horizon, we think that we may soon be approaching the point where the rally in the US Dollar against most major currencies begins to runs out of steam.

The US Dollar itself was fairly range bound against the Euro in the past couple of trading sessions, with a lack of major economic data releases leading to a fairly quiet few days of FX trading across the pond. Fears over a trade war continue to remain the main driver for the currency pair. With fears easing back somewhat, the greenback continues to hover around its lowest level in seven weeks in trade-weighted terms.