Pound rises after inflation data, UK Government sets date for Article 50 trigger

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21 March 2017

thomasdodds

Sterling rose to a fresh three week high against the US Dollar this morning after inflation data for February far exceeded expectations. Consumer prices grew 2.3% on a year previous, its highest level in four years, and much higher than the 1.8% recorded in January (Figure 1).

W
e have been saying for a number of months that the market is underestimating the chances of a Bank of England interest rate hike this year. Inflation that is now back above the bank’s 2% target certainly supports this view.

Figure 1: UK Inflation Rate (2013 – 2017)

The Pound had earlier slipped against the US Dollar on Monday after a spokesman to UK Prime Minister Theresa May claimed that the government will begin formal exit talks with the European Union next Wednesday, 29 March. The triggering of Article 50 will kick-start the two year process of Brexit negotiations. With just about the worst case scenario to negotiations currently priced in, we think risks to the Pound are actually skewed somewhat to the upside in the short term.

The US Dollar traded within a fairly narrow range against almost all of its major counterparts yesterday, remaining relatively soft following last week’s less hawkish than expected Federal Reserve meeting. Financial markets are now pricing in the next rate increase in June, followed by an additional hike in December.

With the Federal Reserve’s March meeting and Dutch Election now out of the way, markets are beginning to turn their attention to the French Presidential Election first round vote in around a month’s time. Centrist Emmanuel Macron and far-right National Front leader Marine Le Pen are neck-and-neck in the latest poll from Kantar Sofres with 26% of the vote each.

However, with Le Pen lagging behind in the second round polls, odds makers are currently giving Macron around a 67% chance of being named the next President. Macron was deemed to have come out on top of last night’s TV debate, with the Euro rallying this morning as a result.

Major currencies in detail

GBP

Sterling rose 0.5% against the US Dollar after the release of the latest inflation data, erasing losses from Monday on the back of the Article 50 trigger date.

House price data from Rightmove was the only economic release of note in the UK on Monday, although its impact on trading was muted. Prices rose by 2.3% in the year to February, right in line with consensus, while increasing by 1.3% on a month previous.

Investors will have one eye on the latest retail sales figures on Thursday.

EUR

The Euro rose 0.3% after Macron came out on top of last night’s French Presidential election debate, having been range bound throughout much of London trading yesterday.

German producer prices came in marginally above expectations yesterday, although had little material impact on the Euro. Producer price growth in Europe’s largest economy surged to a five year high 3.1% in the year to February, slightly above the 2.8% consensus. This positive economic news adds to a stream of recent impressive data out of the Euro-area, causing investors to re-evaluate the likelihood of higher rates in the currency bloc before the end of the year.

With no economic data releases in the Eurozone today, the Euro will likely be driven by events elsewhere. The business activity PMI’s on Friday and opinion polls out of France will be the main focal points this week.

USD

A quiet day of trading in the US ending with the US Dollar index falling by 0.2%.

Federal Reserve member Patrick Harker spoke on the topic of monetary policy yesterday, claiming that he would not rule out more than three interest rate hikes in the US this year. Harker, a voting member on this year’s FOMC, said he wouldn’t be able to judge the economic impact of Donald Trump’s policies until they had been fleshed out. He did, however, claim that there would be an inflation overshoot in the US, which may force the central bank to raise rates slightly more aggressively than outlined last week.

Federal Reserve members Dudley, George and Mester will all be speaking in the US today.