Inflation data slows Pound’s Rise

December Inflation Data provides relief to MPC

There have been several factors at play affecting G7 currencies in the first two weeks of the New Year. Yesterday’s release of inflation data for the UK showed a fall in price rises for the first time since May of last year although, as was seen then, the trend is still upwards.

The rise in the value of Sterling versus the dollar has led to a significant fall in the producer price data which indicates the rise (or fall) in the cost of goods at the factory gate and is a precursor of future consumer prices. The headline rate of inflation in December was 3%, down from 3.1% in November. Producer prices were at 4.9% versus an analyst’s expectation of 5.4% and a November figure of 7.3%.

The pound closed virtually unchanged on the day at 1.3795 having made a high of 1.3807. Overnight, it has rallied a little further, to 1.3837, but has fallen back below 1.3800, last trading at 1.3777 (6.30GMT).

With retail sales data due of Friday and the employment report next week, Sterling is likely to stay in the focus of traders’ minds as the economy dominates and Brexit takes a back seat, for now.

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Euro corrects as Merkel Struggles with Coalition

The likelihood of a breakthrough in the deadlock that has existed in Germany since last September’s election receded further yesterday as part of Angela Merkel’s main partner in the previous alliance, the SDP, voted against further coalition talks.

While this setback could prove to be temporary, were the vote in Berlin to be repeated across the country, new elections would be necessary which would bring further uncertainty following the rise in support for the ultra-right wing AfD in September’s vote.

The Euro slowed its recent rise versus the dollar yesterday, retreating to a low of 1.2195 before rallying to close virtually unchanged at 1.2266. It has briefly traded above 1.2300 overnight before a bout of profit taking drove it back to a low of 1.2245. This remains close to the highest level for the single currency since mid-December 2014.

Today’s release of inflation data for the entire Eurozone follows yesterday’s report for Germany. In December price rises in the Eurozone’s largest economy grew by 1.6%, unchanged from November. Analysts expect another unchanged result for the whole region with inflation remaining at a benign 1.4% relieving the pressure on the ECB a little. Should the data be in line, this should have little effect on the Euro’s continued rise.

Dollar woes continue

In line with the pause for breath by the pound and euro yesterday the dollar index managed to hold just above the psychologically significant 90.00 level yesterday although it remains likely to fall still further. Technical traders are committed to a test of the support at 89.50 which dates back to August 2014.

The weakness in the dollar, driven primarily by uncertainty over the future path and pace of interest rate increases has coincided with (irrational) optimism over Brexit which has pushed Sterling higher and some (so far, also irrational) expectation of a tapering of the ECB’s Asset Purchase Scheme earlier than had previously been expected.

With the new Fed Chairman Jerome Powell set to take over from Janet Yellen on February 4th even though he hasn’t, so far, been confirmed by the Senate, uncertainty over how the FOMC will be made up will bring further downward pressure for the dollar which has been primarily been supported by a widening of the interest rate differential between the greenback and its G7 partners.

There is little in the way of fresh economic data due out in the U.S. before Jan. 26th when the first cut of Q4 GDP will be released. Any significant variance from the 3.2% seen in Q3 could either halt the slide or add to its velocity.