Sterling Tumbles after UK Inflation Climbs
British currency, Sterling is dropping early in the morning after the release of the UK July inflation report, which showed below-expectation prints across the board.
UK headline consumer price index (CPI) re-accelerated less than expected to 2.2%, but the biggest news was the larger drop in services inflation from 5.7% to 5.2%, ING analyst Francesco Pesole said in a note.
Service inflation, by market consensus was projected to come at 5.5% while Bank of England had forecasted 5.6%. Data also showed that UK core inflation also decelerated meaningfully from 3.5% to 3.3%.
Analyst said whether this changes the picture for the BoE is an open question. ING UK economist notes that the services CPI miss was largely due to a correction in hotel prices after they surged in June.
Remember that the BoE overlooked some volatile components like this one when they cut rates earlier this month, and a core services inflation measure (stripped out of those components) was actually unchanged in July.
There is therefore a chance that the monetary policy committee (MPC) may not put great emphasis on this downside surprise, Pesole said.
Analyst said until policymakers actually comment on this and perhaps tame any enthusiasm for larger easing, markets may be inclined to price in more cuts into the Sonia curve, also given the external pressure from the dovish repricing in Fed expectations.
All in all, analyst said this morning’s inflation figures still help its EUR/GBP bullish call, and continue to see the pair as a preferable channel to play BoE-related GBP weakness as opposed to GBP/USD, where some dollar softness can still offer support. A return above 0.860 in EUR/GBP looks warranted.
UK unemployment rate dropped from 4.4% to 4.2%, according to report released yesterday. ING analyst said this will probably raise more concerns about data quality rather than offering clarity to the Bank of England.
It is widely known that the survey used to calculate the unemployment rate has had very low response rates, according to a note. The rest of the jobs report is less surprising. The slowdown in wage growth is primarily due to the base effect and was generally in line with consensus. The month on month figures in the private sector continued to show some strength though. #Sterling Tumbles after UK Inflation Climbs
