Soft UK inflation, retail sales data bring Bank of England rate hike into question

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19 April 2018

thomasdodds

The Pound traded lower against the US Dollar for the second consecutive day on Wednesday, the first time it has done so since the end of March, after yesterday’s UK inflation data fell short of expectations.

H
eadline inflation in the UK unexpectedly slowed to 2.5% in March, its lowest level in a year, after investors had eyed an unchanged reading of 2.7%. While in itself disappointing, its implications for the path of Bank of England interest rate hikes will be of much more concern to investors ahead of the May MPC meeting. The level of core inflation, of which excludes volatile components of energy and food, also undershot expectations, coming in at 2.3% versus the 2.4% consensus.

While we think the inflation miss is unlikely to derail another rate increase from the BoE next month there is now likely to be a much more divided view among the committee than we had previously anticipated. Financial markets have also subsequently discounted the possibility of a second rate hike this year, having been pricing one in prior to yesterday.

To compound the misery for Sterling, this morning’s UK retail sales also fell well short of expectations. Sales in March rose by just 1.1%, while declining on a month-on-month basis for the third month out of the previous four. This heaped more selling pressure on the Pound today, while raising further question marks as to whether a May hike is the done deal that much of the market had made out earlier in the week.

Eurozone inflation slides ahead of next week’s ECB meeting

A similarly underwhelming set of Eurozone inflation figures led to a brief sell-off in the Euro yesterday, although the currency brushed it aside to end the day higher. The data does, however, continue to underline our view that the European Central Bank will be very reluctant to tighten monetary policy any time soon. Headline inflation in the Eurozone slipped back to 1.3% in March after investors had eyed a 1.4% reading, while core price growth remained stuck at just 1.4%, well below the 2% target. We expect the ECB to maintain its dovish rhetoric when it next meets in seven days’ time.

Meanwhile, the US Dollar index ended the London session mostly unchanged, clinging onto gains after rising from a three week low. Federal Reserve members added very little, with members Kaplan, Dudley and Bullard not touching on monetary policy. The greenback remains dependent on geopolitical factors. In the absence of any news on that front, investors will be looking towards this afternoon’s Philly Fed manufacturing survey and latest jobless claims figures, although neither are likely to materially shift the currency.