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Sterling buoyed by rate comments

Mon 18 September 2017

Highlights from last week:

  • GBP Sterling surges on BoE comments
  • GBP UK inflation rises, wages stagnate
  • USD Consumer inflation increases

The week ahead:

  • USD Fed rate decision (Wednesday, 7:00pm)
  • NZD New Zealand GDP (Wednesday, 11:45pm)
  • CAD Canadian CPI data (Friday, 1:30pm)

View exchange rates and interest rates

UK rates hold firm, future rate rises expected

The Bank of England on Thursday voted 7-2 in favour of maintaining the current base rate of 0.25%.

Although the voting split was effectively the same as previous announcements, and in line with market expectations, the BoE admitted that rates may be increased ‘within months’ – a hawkish viewpoint far ahead of prevailing market expectations which saw a prospective increase in 2018. The effects were immediate, with sterling soaring across the board, reaching highs above $1.330 against the US dollar and extending gains above €1.12 against the euro. There were also comments that continuing inflationary pressures may lead to a withdrawal of monetary stimulus programs over the coming months.

These comments were further supported on Friday, by the Bank of England’s Gertjan Vlieghe, a historically dovish member of the MPC, who stated that rates may need to rise faster than expected on the back of increased consumer spending. This further boosted sterling, with the pound advancing to fifteen-month highs against both US dollar and Japanese yen at $1.3616 and ¥151.54 respectively. This represents the pound reaching the highest level against the US dollar since the EU referendum in 2016.

Sterling strengthens on inflation data, weakens on wage growth

On Tuesday, UK Consumer Price Index data showed that UK inflation rose to 2.9% in August, up from 2.6% in July, spurred by a rise in clothing and footwear prices. Inflation therefore continues to be above the Bank of England target of 2.0%, and the BoE expects this to overshoot the 3.0% benchmark in October. Sterling rose against major pairings following the announcement, reaching a one-year high against the US dollar at $1.3257 and €1.11 against the euro at the time.

Gains continued into Wednesday morning, although the release of UK unemployment and wage growth figures saw sterling back below €1.107 against the euro as wage growth slowed to 2.1% as opposed to 2.2% predicted. Despite this, UK unemployment fell to the lowest level since 1975 at 4.3%, below predictions of 4.4%. Wage growth continues to stagnate despite rising inflation, placing a squeeze on consumers and adding pressure on the Bank of England to raise interest rates to calm a potentially overheated economy.

US consumer prices rise on hurricane impact

Inflation data released in the US on Thursday showed a small rise as CPI figures for August increased by 0.4%, beating expectations of a 0.3% increase. This rise was driven largely by an increase in energy costs following Hurricane Harvey, with gasoline prices rising by 3.9% in August. Shelter costs also saw a sizeable rise, increasing by the largest amount since October 2005. Retail sales fell by 0.2% in August, largely due to a fall in demand for vehicles, disappointing analyst predictions of a 0.1% gain.

Tensions continued to grow between the US and North Korea following the test of a further rocket on Friday, adding further uncertainty as Kim Jong-Un claimed that North Korea had nearly reached its nuclear objective, despite sanctions aimed at preventing this.

The week ahead

The US dollar calendar will be dominated by the Federal Reserve’s interest rate decision (Wednesday, 7:00pm). While US interest rates are expected to remain unchanged at 1.25%, the forecasts of individual Fed members will serve to highlight the possibility of an interest rate rise in 2017. There are also expectations that the Fed will announce the gradual unwinding of its balance sheet, releasing a portion of the $4.5tn assets accumulated via quantitative easing programs in place since 2008. US PMI data (Friday, 2:45pm) will provide an insight into the health of the US manufacturing sector.

The Governor of the Bank of England Mark Carney is due to speak in Washington (Monday, 4:00pm) which will be eagerly anticipated following hawkish comments from other BoE members last week, with investors seeking to dissect any comments regarding the future of the UK economy.

Inflation data is to be released across the Euro zone on Monday, with CPI figures serving to highlight any further inflation following increased annual inflation last month. This is further supported by the release of both services and manufacturing PMI data (Friday, 9:00am). CPI data is also to be released in Canada (Friday, 1:30pm) alongside retail sales figures (Friday, 1:30pm).

Other data releases include UK retail sales (Wednesday, 9:30am) and New Zealand GDP figures (Wednesday, 11:45pm).

View UK, US and euro zone announcements with our economic calendar

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Other key data releases:

Euro zone ZEW Survey (Tuesday, 10:00am)

Japanese All Industry Activity Index (Thursday, 5:30am)

Canadian Retail Sales (Friday, 1:30pm)

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