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Sterling In Orderly Decline After Inflation Ticks Lower

Published 16/01/2018, 13:20
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CPI bereft of shocks

UK inflation printed in line with economists’ forecasts with a 3% rise year-on-year in December, and this kept the hit to a recently reinvigorated sterling contained. The nuanced move suggests sterling traders are balancing the broadly accepted outlook for inflation to ease throughout the year, against indications from December that declines may not have kicked off yet. The Office for National Statistics muddied the water further, with one official noting it was too early to say the slight fall from November’s six-year high of 3.1% represented the beginning of a sustained fall.

UK B2B prices edge higher

The picture from business prices was even less equivocal. Manufacturers raised prices charged to 3.3% against the 3.1% rises of November. It’s possible that the pass through effect of the increase could eventually keep consumer prices more elevated longer than most forecasts currently expect. That prognosis contradicts the Bank of England’s view that inflation peaked late last year and is set to drift lower over the next few years back towards the BoE’s 2% target. The core rate CPI notched on Tuesday also behaved itself from the Bank’s perspective. Flat at the same 0.3% monthly rise of November, the source of that month’s froth looked more and more like volatile inputs, such as fuel and food, prices of which are not expected to remain taut for a sustained period.

BoE watches wages

Even if the BoE is incorrect however, it is highly unlikely that the Bank will feel pressured to mandate another rate rise when it meets next month. The Bank has made clear that its main watch point now is wages. These have shown little sign of accelerating over the last year. BoE’s stance was backed by input cost inflation. That duly eased to a 4.9% year-on-year rate in December from November’s 7.3%. It was the weakest rise since July 2016, suggesting the shock to prices of overseas goods immediately following sterling’s depreciation is beginning to drain as the pound recovers.

The BoE will also look through this coming Friday’s Retail Sales data. They are likely to reveal tell-tale marks of another bout of Black Friday intemperance by retailers. The November event probably, again, brought forward Christmas shopping by a month, leaving fall over trading closer to the holiday. November Retail Sales rose 1.1%, enabling the annual rate to bounce back to 1.6% that month from zero the month before. The pattern is now well established since Britain adopted the U.S. tradition of Black Friday in 2015. We expect market impact to any Retail Sales decline to be minimal.

Sterling sentiment stays sanguine

As for the market impact from largely as-expected inflation data on Tuesday, relief is palpable because the economic volatility that brought a number of shocks last year looks to have abated. The pound, having begun to ease from Monday’s 18-month highs vs. the dollar well before Tuesday trade, did not extend declines sharply. It was set to retain support at Monday’s lows, at the time of writing. These were a tad above the $1.37 handle, which themselves referenced highs marked at the end of last week.

Furthermore, the extent to which the dollar’s pain has helped sterling’s gains remains evident from a much more turgid advance against the euro. The pound was up against the single currency at 88.77 pence, but that was towards the midpoint of an 102 point range that’s prevailed since late November. Sterling has not risen beyond 86.87 pence against the euro since mid-September.

The FTSE 100/sterling inverse correlation underpinned the benchmark index for a time before it eased on Tuesday. However, slim evidence of broader equity market support came from the FTSE 250. This remained positive despite questions over the eventual impact of Carillion’s collapse on a clutch of industry peers. Some of these have disclosed impairments following partnerships with the insolvent infrastructure group.

Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient.

Any references to historical price movements or levels is informational based on our analysis and we do not represent or warrant that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, the author does not guarantee its accuracy or completeness, nor does the author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

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