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Sterling gives back gains following UK inflation data

Sterling edged higher against the US Dollar on Tuesday following the release of the latest set of UK inflation data, although gave back almost the entirety of yesterday’s gains as markets opened this morning.

Tuesday’s inflation data further ramped up speculation that the Bank of England could be ready to raise interest rates again in the coming months. Despite a slowdown in food prices, headline inflation stood firm at 3.0% in January after the market had anticipated a decline to 2.9%. Of concern to the Bank of England will be the increase in the rate of core inflation. Core inflation, of which strips out of the volatile components of food and energy, accelerated back to 2.7% from 2.5%, still comfortably above the central bank’s 2% target level. This reinforces our view that the BoE will raise interest rates again at its May meeting, when it releases its next set of economic projections as part of its quarterly Inflation Report. The latest set of German growth data also beat expectations this morning, with Europe’s largest economy growing by 2.3% in the fourth quarter versus the 2.2% consensus. The common currency, however, was little moved on the news, remaining around a one week high ahead of the more meaningful Euro-wide GDP release later this morning.

New FOMC Chair Powell warns against financial stability risks

The US Dollar sold-off against most major currencies yesterday as risk appetite continued to return following last week’s sharp decline in stock markets. One of the main beneficiaries of broad US Dollar weakness was the Japanese Yen, which rallied to its strongest position in five months on speculation that the Bank of Japan could be ready to dial back its monetary stimulus. New Chair of the Federal Reserve Jerome Powell added little new information during his ceremonial swearing-in as head of the central bank yesterday. Powell said that the bank remained alert for financial stability risks in order to preserve ‘essential gains in financial regulation’. As we have mentioned in the past few weeks, we do not think the appointment of Powell will materially affect either the pace or timing of interest rate hikes in the US this year. Attention today will turn to this afternoon’s US inflation data, which could prove a major market mover. Inflation is expected to have slowed to 1.9% in January from the 2.1% recorded in December.



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