Today, UK Inflation readings are expected to show a break of the downward trend which has brought price levels below the Bank of England’s Inflation Target in Q4 of last year. Whenever discussing monetary policy, it’s quite easy to zoom out and focus on their primary objective of steady inflation growth at 2%. In fact, divorced from fundamental economic readings, focusing on inflation as measure of UK performance is worse than meaningless, it’s often misleading.
If we consider the backdrop for a moment, we see nearly non-existent industrial and manufacturing production, flagging retail sales, declining business investment and moderate house price growth. In an environment where unemployment is at historic lows of 3.8% and earnings growth is approaching pre-Global Financial Crisis levels in excess of 3%, the most probable cause for faltering business conditions is low demand. In the main, this will be due to lack of confidence surrounding the UK’s post-Brexit trading arrangements. In that context, rising prices are due either to imported inflation – this is not the case here, since the Pound is about where it was a year ago and energy costs are declining – or scarcity. To look at this rising inflation and see it as good news is entirely backwards.
Bottom line: Usually, rising inflation argues for tighter central bank monetary policy setting. With the economy where it is, the Bank of England are more likely than ever to ‘look through inflation’ and support the economy rather than the other way around. Take higher-inflation headlines with the pinch of salt they are worth. There is a lot of political work to be done and fiscal policy to implement before the fundamentals correct and inflation comes into focus once again.
Yesterday, Sterling closed relatively unchanged against the Dollar after an initial 0.6% climb in the morning. Greater volatility may be expected today following UK inflation out this morning. Recently, the pair has been trapped between the narrowing 100 and 50-daily moving averages. A breakout of this range, which sits at 1.2949 and 1.3060 respectively, could occur today following UK and US inflation data.
The currency-cross reached highs not seen since December’s UK general election, peaking at 1.2074 before ticking lower. This morning’s UK inflation data could be the main driver of the pair throughout the day since today’s Eurozone data calendar is light. A push to the 1.21 level would mark the highest level for GBP/EUR since the 2016 Brexit referendum.
The Euro continues to drift lower, with short lived rallies being sold into and lows of 1.0786 being reached in yesterday’s session – the lowest level since May 2017. A light day for Eurozone data means price action may remain flat ahead of this afternoon’s US inflation data. What’s more, the pair could be supported by a topping out of the US Dollar’s recent rally, which trades just shy of 2019’s high on a trade-weighted basis.