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UK inflation shortfall scuttles Pound as question marks rise over rate hike

Today’s macro highlights:

  • GBP - UK Retail Sales (June)
  • USD - Philadelphia Fed Manufacturing Index (July)

UK inflation shortfall scuttles Pound as question marks rise over rate hike

Another blow was served up for the Pound during yesterday’s session after UK inflation readings fell short of expectations. CPI came in at 2.4%, unchanged on a month earlier and below the 2.6% that had been forecast, leaving some commentators to suggest that the Bank of England may now not go through with a rate hike next month. GBP/USD pushed down to levels not seen since September, but it’s interesting to note that the lacklustre price rises were driven by manufacturers absorbing many increases. They can only do this for a finite period as profitability needs to be maintained and the Pound managed to recover to pre-data levels over the course of the day.

With the growing divide over UK interest rate hikes, today’s retail sales figures will be closely watched. They’re due for release at 9.30am BST and this reading could prove pivotal in the market’s assessment of whether we see UK monetary policy tightened in August. The year on year figure excluding auto fuel is the one to watch and this is already forecast to come in some way below the 4.4% printed a month ago. Falling price pressures obviously play a role here, but the continued run of good weather and England’s relative world cup success should have kept the tills ringing. Disappointment today could really call into question whether the Monetary Policy Committee has room for manoeuvre in the near term, risking further losses for the Pound as a result.

It’s a relatively quiet day on the economic calendar, but the Philadelphia Fed’s monthly report at 1.30pm BST will likely attract some attention. This survey of around 250 manufacturers in the Philadelphia Fed’s catchment area has some forward-looking qualities and with the market still hunting for anything that confirms the Federal Reserve’s ability to make two more rate hikes before the end of the year, this number will be closely followed. An uptick from last month’s reading is expected and with the continued health of the country’s economy, there’s little reason to expect today’s numbers will disappoint.

In other news, the UK’s new Brexit Secretary Dominic Raab is set to meet the EU’s chief negotiator today. As a committed Brexiteer, the question is whether Mr Raab can make a meaningful difference with the clock ticking. Draft EU papers are starting to show some signs of panic over the possibility of a hard Brexit, with failure to reach a deal likely to impact European business and citizens, too. We may be heading into the summer lull, but signs of progress today could well give the Pound something to cheer.

The pair lost half a cent off the back of yesterday’s inflation reading, but subsequently posted a recovery, suggesting that there’s been no meaningful impact on the prospect of a rate hike. Short term risk does however seem to be weighted on the downside.

There was little change for the pair during yesterday’s session and we remain comfortably above recent lows. However the lack of data from the Eurozone and ongoing positivity over the health of the US economy could make gains hard to sustain.

We saw fresh multi-month lows tested yesterday off the back of that disappointing inflation reading and concern over the outcome of Brexit really does seem to be weighted against the Pound despite the fact it will have some impact on the remainder of the Eurozone, too. Good news from Dominic Raab and an upbeat retail sales reading could deliver some real upside in the short term.