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To Hike Or Not To Hike? Pound Falls As Inflation At One Year Low

Published 18/07/2018, 19:58

The FTSE rose for a second consecutive session on Wednesday helped higher by BHP Billiton (LON:BLT) and Easyjet on the back of strong corporate updates; and supported by a slump in the pound as doubts emerge over an August interest rate rise.

The pound tumbled to a 10-month low versus the dollar after inflation in June failed to tick high. CPI remained constant at 2.4% year on year, lower than expectation of a 2.6% yoy increase. Whilst petrol prices hitting a 4-year high and sterling’s depreciation would have gone some way to lifting inflation, house prices and summer clothing sales acted as a downward pressure. Core inflation, which doesn’t include more volatile items such a food and fuel dipped to 1.9%, down from 2.1% in May.

These figures could give the BoE reasons to pause for thought over an August rate hike. With inflation steady at a one year low and average wages slipping, the central bank could have problems justifying the need for a rate hike. Policy makers could use the argument of recovering economic growth over the last few months, however the inflation figures show that growth is not at levels where it is starting to push up inflation. From whichever angle you look at this the data so far this week has not been supportive of an interest rate rise. Instead we are in danger of seeing a repeat of May, where weak data leading up to the MPC meeting prevented the widely expected rate hike. The market expectations of a rate hike slipped to 72% from 77% prior to the release.

Fed Chair Powell To Send Dollar Higher (again)?

Traders will now turn their attention to Fed Chair Jerome Powell in his second appearance this week, this time in front of the House. Another bullish assessment on the economy from Powell, could see the dollar take another leg higher, potentially pushing the pound through support at $1.30. Powell’s appearance before the Senate Banking Committee on Tuesday saw both stocks and the dollar rally as the Fed remained upbeat on the outlook of the economy, gradual rate rises and refused to flinch over trade war uncertainties.

EasyJet Raises Guidance

On the stocks front, EasyJet (LON:EZJ) fly into the top 10 on the FTSE after a trading update boosted earning and revenue guidance. EasyJet continues to show an impressive resilience even in the face of French air strikes and a rare UK heatwave. A successful push into Germany and the collapse of some of its rivals means that EasyJet has been able to shrug off sector challenges to increase its income per passenger.

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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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