Market Report - 14/02/2024
UK inflation stays flat and beats expectations ; EU avoids technical recession
The UK’s consumer price index (CPI) inflation has stayed flat at 4% in January leaving it unchanged from December’s reading. This result is well received having beaten economists’ expectations, who forecasted that inflation would increase to 4.2%. Interestingly, the figures showed the first monthly fall in food prices for more than 2 years, having dropped 0.4% - the last decline was in May 2021.
The core measure of CPI also remained unchanged in January, at 5.1% annually. And that was lower than the 5.2% expected by economists. The core measure ignores volatile energy, food, alcohol, and tobacco to try to get a more accurate picture of underlying inflationary pressures.
Following the CPI announcement, Chancellor Jeremy Hunt said: “Inflation never falls in a perfect straight line, but the plan is working; we have made huge progress in bringing inflation down from 11%, and the Bank of England forecast that it will fall to around 2% in a matter of months.”
According to several economists, it remains likely that the headline rate will now fall back to the 2.0% target in April, then dropping further beyond with some key factors ahead for the United Kingdom, most notably Ofcom’s expected cut of the energy price cap.
With this in mind, The Bank of England are seemingly now gearing up to cut interest rates, though Governor Andrew Bailey has a big decision to make as this would likely push inflation back up. UK interest rate futures show that markets have increased their bets on rate cuts during 2024 (with suggestions there are now several cuts on the way). According to data, there is now a 24.3% chance of a cut in May, rising all the way to a 98.3% chance in December 2024.
Elsewhere in the UK, the ONS announced this morning that UK house prices fell by 1.4% in the year to December 2023. Which is a slower decline than the 2.3% reading taken in November for the same year.
In the rental market, prices rose by 6.2% in the year to January 2024, retaining the fastest pace of growth since the measure was first introduced back in 2016. The ONS outlined in their statement that out of the UK, England and London both have the highest annual percentage change in private rental prices.
Looking at the Eurozone, this morning we had the release of EU GDP data; which was the key risk event on an otherwise quiet economic calendar for the euro this week. The data came in exactly as forecast, with YoY GDP showing growth of 0.1% and QoQ inflation coming in flat at 0%. This data release hasn’t added too much further volatility to the markets following the aforementioned CPI release, although GBP/EUR has continued to trade near the daily low of around 1.1717; whilst EUR/USD is hovering slightly below the 1.07 mark.
Looking ahead, we have got the eagerly anticipated UK GDP release tomorrow morning, along with US Retail Sales and two speeches from European Central Bank members tomorrow afternoon. These events will keep market makers on their toes when identifying fresh impetus for some of the major currency pairs.
Yesterday, in the US, CPI data was released and showed that whilst inflation growth has slowed, it was not as much as expected and missed economists forecasts. The headline rate of US inflation fell to 3.1% in January, down from 3.4% in December but still higher than the forecast of 2.9%. The result of this means that it is now likely the Federal Reserve could delay potential rate cuts.