Dollar Weak As We Wait On Inflation

GBP: Inflation holds up and keeps a May hike in play

UK CPI remained at 3% in January according to the latest numbers from the Office of National Statistics, slightly higher than the consensus expectation of 2.9%.

There are opposing forces within the UK inflation picture at the moment with the impact of the devalued sterling falling out of the calculations whilst domestic inflation forces are starting to grow. This may mean that businesses are more able to uphold margins in the short term but only if that translates into higher wages will consumers, who would have been hoping for a pronounced decline in the rate of inflation, feel the benefit.

This is the tightrope that the Bank of England must walk and today’s number will keep the May Bank of England meeting ‘in play’ for an interest rate hike. We think that this is still too early for a hike as caveats on Brexit and the sustainability of growth remain but as we heard last Thursday, the sticky inflation picture is putting gradual but earlier increases in the base rate into more people’s central scenarios of what happens in the UK in 2018.

The data calendar is quiet today and sterling news will be until Friday’s retail sales report.

USD: More inflation to come in the States?

The most important piece of news this week is due this afternoon in the form of the US CPI at 13.30. As we noted on Monday, and following on from both the run higher in wage costs in this month’s wages numbers and the increase in US bond yields, how much the cost of living in the US is rising and what this means for the Federal Reserve’s program of interest rate hikes have been the drivers of some of the recent volatility.

Currently market expectations are for the US central bank to increase interest rates in March, June and December of this year with a risk to another – most likely in September – should the inflation picture be driven on by increases in wages and the stimulus provided by the Trump administration tax plan.

Consensus expectations are for a reading of 1.9% with a number north of 2%, likely to help the dollar. For now however, the market seems to be betting on a disappointment or at least a softening of those rate expectations and the dollar is down this morning.

US retail sales are also due this afternoon.

The Day Ahead

Other than that, we are quiet although Eurozone GDP at 10am this morning could add some spice to the euro which is looking strong against the pound at the moment.

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