The pound is rallying against all its major peers this morning after the release of the joint-highest UK CPI reading in four years. The rise in sterling is weighing on blue-chips with the FTSE 100 erasing early gains to fall by 10 points and retest the 7400 handle.
UK inflation rises more than expected
The most recent data on inflationary pressures in the UK has shown a small increase, with CPI Y/Y rising to 2.9% for the month of August. The rise is slightly above the consensus forecast of a 2.8% increase, and remains well above the Bank of England’s (BoE) 2% target. The rise has shown that markets may have been premature in believing the same-size increase back in May was a high-water mark and you have to go back to 2013 to find a faster rise in prices.
Higher prices could see more BoE dissent
With BoE rate-setters scheduled to announce their latest monetary policy in just over 48 hours time, today’s release will do little to appease the dissent seen amongst the committee seen last time out, with two members opposing the decision to keep rates at record lows. In terms of market reaction The GBPUSD has popped higher immediately following the release and posted its highest level in almost a year after moving above 1.3267. It remains highly unlikely that there is any tangible policy shift this Thursday, but should any other MPC member join Mccafferty and Saunders in dissenting then there could well be another leg higher seen in the pound.
Inflation to top 3%?
Carney and MPC members had forecast inflation to peak this Autumn, but several recent data points for this economic indicator have been above central bank projections. The chief cause of the inflation has been the fall in the pound and whilst some of the sterling depreciation will fall out of the year-on-year figures there is still a substantial amount that could be felt in the coming months. The day after the Brexit vote, the outcome sparked a collapse of around 10% in the GBPUSD, but there were further reaching consequences with a considerable amount of downside still to come. As you can infer from today’s rise to a 1-year high in the GBPUSD the market a year ago traded at similar levels before another drop of roughly 10%, making a low in mid-January. The lag between a fall in the currency and the subsequent rise in inflation isn’t an exact science, with best estimates putting it in the 6-12 month bracket. Furthermore, it wasn’t until December 2016 that a marked increase in CPI Y/Y became apparent and this means that in Y/Y terms the coming months readings will have a relatively low base.
FTSE slides on GBP rise
Stocks in London began the day on the front foot and looking to add to Monday’s impressive gains, but the spike higher in the pound following the CPI release has seen them slide into negative territory. It’s little surprise that some of the biggest losers on the day are those most sensitive to the strength of the pound with Fresnillo (LON:FRES) and Randgold Resources (LON:RRS) both seeing some selling. There’s also some notable weakness in housebuilders with Taylor Wimpey (LON:TW) and Barratt Developments (LON:BDEV) in negative territory despite a larger than expected increase of 5.1% in the UK house price index. Banks are enjoying a move higher this morning with Barclays (LON:BARC), Lloyds (LON:LLOY) and RBS (LON:RBS) occupying 3 of the top 4 spots on the FTSE 100 leaderboard. Recent trade hasn’t been too kind to this sector with some sizable declines seen over the past month, but higher inflation increases the chances of a more hawkish - or at least a less dovish - monetary policy stance from the BoE, which in turn would lead to a higher operating margin environment for lenders.