Prices drive sterling higher
Yesterday’s inflation numbers from the UK were a positive surprise for the pound but a 0.1% YoY CPI number is hardly going to set anyone's trousers on fire. The fact is that inflation is positive in the UK and that is positive for the UK.
A period of ultra-low inflation is an obvious benefit for the UK economy (i.e. almost non-existent price rises in goods and services that consumers must buy, such as food and energy) frees up more disposable income elsewhere. It will also allow people to pay down debt and replenish savings that may have needed to be used during leaner times. This has been the driver of the UK recovery since 2012 and long may it continue.
Work the core
We highlighted that core inflation would be the most important component of the release, and the rise to 1.2% — the highest in five months — will flesh out the argument that domestic inflation is building and that the headline figure is only this low due to external factors (commodities and the pound). This is crucial for interest rate hikes and we maintain our calls for a February interest rate increase. Sterling has remained supported and was able to push to a fresh seven year high on a trade weighted basis afterwards. I can see the pound remaining supported through tomorrow’s retail sales numbers in a bounce back from June’s surprising decline. An interview with outgoing Monetary Policy Committee member David Miles with the BBC yesterday in which Miles suggested that rate hikes were coming “pretty soon” has also driven sterling onwards.
I predict a Ja!
Focus shifts to the German parliament this morning as a vote on the latest Greek bailout is due. There is little chance that the vote will cause any commotion, but we will wait to see just how many members of the Bundestag will vote down the measure. German Finance Minister Schaeuble has called for members of the parliament to vote the measure through and his reservations are both wide ranging and widely known. In the absence of tier 1 structured data from the Eurozone today, we have to wait on Friday’s run of PMI data.
Ding Dong
Ripples from China have continued overnight with a couple of devaluations in Asia a likely side effect of last week’s news. The Vietnamese central bank decided last night to devalue its dong for the third time this year while the Kazakhstan tenge has fallen by 4.5%. Now we know that there are many people reading this who are tenge or dong participants, but it shows the natural second round effects to a currency devaluation by such an important economy.
Big day for the dollar
Away from Berlin, the most important news today comes from the States. Those looking for the Federal Reserve to lift interest rates in September will be hoping for inflationary pressures to be seen to be building with a core CPI outperformance. As the Bank of England has been happy to do, the Federal Reserve will likely look through low headline numbers given the falls in energy and food prices.
This evening we also get the minutes from the latest Federal Reserve meeting and we will be looking for further signals as to the timing of the first rate hike through changes in the language surrounding the labour market, inflation and global risk. The minutes are due at 7PM BST.