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Inflation rose for the first time in 2024 this July, rising to 2.2%
This morning’s inflation figure has sent the pound to a new low for the month against the euro and its lowest against the US dollar since May.
The UK’s inflation figure has just come in at 6.7%, slightly lower than last month but significantly lower than expectations that it would rise due to petrol prices resurging. Moreover, background inflation data was also positive, with core inflation down to 6.2% and producer prices (the prices of goods leaving factories) dropping by 0.4% in the past month.
The impact on exchange rates has been dramatic, with sterling falling across the board, due to the possibility that this means the Bank of England (BoE) may not raise interest rates after all tomorrow.
In terms of global exchange rates, the decision of the US Federal Reserve (“The Fed”) this afternoon is also likely to have ramifications, but more so for the commentary in the press conference afterwards, where we may get some indication as to whether this is the last rate hike for a while.
In the US yesterday there was very mixed news on property, with a large increase in building permits being issued (1.54 million in August 2023 being 100,000 more than expected), but a 160,000 fewer housing starts that in July, an 11% year-on-year drop.
In business and political news, prime minister Rishi Sunak is reported to be ready to water down or delay some of the green policies, or as Downing Street put it, be “pragmatic and ensure costs are not passed on to hard-working families”. Mainly this seems to involve delaying the ban on new petrol car sales and new gas boilers until 2035.
One cost still rising fast is HS2, which is likely to cost £91bn rather than £70bn, according to the FT this morning.
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GBP: Sharp drop in sterling following CPI data
That latest inflation data for the UK shows Consumer Price Inflation (CPI) dropping to 6.7%, and the effect this could have on the BoE’s interest rate decision tomorrow has already created ripples in the markets.
Aside from that, tomorrow there will be data on public finances, with the Public Sector Net Borrowing data, and then on Friday there is both GfK Consumer Confidence and retail sales.
Both of these have the potential to affect exchange rates.
GBP/USD past year
EUR: Markets to parse ECB rate-setter comments
The euro had a broadly negative day, weakening by between a third and half a percent against the Norwegian krone and various non-US dollars.
Final results for inflation came in broadly as expected, with eurozone core inflation at 5.3% and CPI inflation dropping slightly more than expected to 5.2% in August
Throughout the day we will hear from several members of the European Central Bank (ECB’s) Governing Council, which sets interest rates.
USD: Interest rate pause expected
The dollar weakened yesterday morning, but had largely regained those losses by the end of the day against sterling, and this has been boosted by UK inflation today.
Yesterday’s mixed signals on housing, which is directly and rapidly affected by interest rate policy, will have given little guidance to the members of the Federal Open Market Committee (FOMC) as they deliberate on interest rates today. The Fed’s decision will come at 7pm UK time but the betting is on rates being held. Hold on for the press conference, however, as it may be instructive on future policy.
The next big data event will be PMI on Friday.
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