UK CPI, EU growth fails to enliven markets

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Although the data calendar was the busiest for a while yesterday the net result was a rather lacklustre trading session as volumes remain very low. Global equity markets finished roughly unchanged, while EURUSD, GBPUSD and GBPEUR all flirted with each other for a while before agreeing to keep everything as is. The data was a lot more interesting however.

Last week’s Bank of England Inflation Report was presented by an MPC that forecasted lower inflation going forward here in the UK with the fears that it may be below target in the medium-term. Fast forward to yesterday and, it was strangely ironic, the day after Brent Crude hit the highest level for 3 months we saw CPI jump back to 2.6% against an estimated 2.3%.

While the increase in fuel prices have had some effect the lack of a large drop in clothes prices on the High St is telling. Retailers had cut prices in May and June to try and tempt people through the doors as the rain teemed down and found no more room to cut in July. Whether this has worked will be seen in the next round of retail sales and quarterly retail earnings announcements.

The higher inflation obviously damages the monetary policy outlook in the UK as the Bank of England and Chancellor were hoping and indeed forecasting inflation below target in the medium term. The Governor had seemed to rule out interest rate cuts or substantial QE at the latest inflation report but we will find out how much in agreement the rest of the MPC is when the minutes of the latest meeting are published this morning at 09.30.

The Bank also forecast lower growth going forward, something that will increase the political pressure on George Osborne following the inevitable comparisons with the Eurozone, following the latter’s growth numbers yesterday. The wider EZ saw growth slip by 0.2% in Q2, supported by a strong Germany (+0.3%), Netherlands (+0.2%) and a stable France (unchanged). Obviously this highlights the divergence between the “core” European nations and the periphery, with Spain and Italy posting large negative figures, and therefore the pressure will remain on funding costs.

While the euro edged higher on the stronger than expected numbers, the enthusiasm waned as it became clear that the outlook for those “core” countries has worsened since the end of June. German industrial production and factory orders have nosedived so far in Q3 while consumer pressures in the rest of Europe will ensure consumption is kept low. The two-speed Europe is rapidly becoming one-speed, and that speed is likely to become reverse.

In the US, the data was good and has led to further pricing out of further QE from the Fed soon. US retail sales rallied to their best figure since February, increasing by 0.8%. This has pushed USDJPY higher and haven bonds (Germany, US, Japan) are moving to the highest yield levels for at least a month.

UK data comes in the form of UK unemployment which will hopefully continue its role as the brightest light so far of the UK economy. The figures are likely to worsen through H2 (post-Olympics for example) but we doubt we will see any increase in the unemployment rate.

Indicative Rates Sell Buy
GBPEUR 1.2685 1.2712
GBPUSD 1.5652 1.5572
EURUSD 1.2323 1.2346
GBPJPY 123.55 123.85
GBPAUD 1.4958 1.4984
GBPNZD 1.9461 1.9488
GBPCAD 1.5545 1.5573
NZDUSD 0.8032 0.8054
GBPZAR 12.84 12.89
USDZAR 8.1983 8.2283
GBPPLN 5.1768 5.2034
EURJPY 97.28 97.54

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