Market Report - 16/08/2023
UK CPI drops to 18 month lows ; Market awaits FOMC minutes
The UK’s inflation rate has fallen to its lowest level since spring 2022, the start of the Ukraine war. The Consumer Prices Index rose by 6.8% in the year to July, the Office for National Statistics reports, down from 7.9% in June, meeting City economists’ expectations. That’s the lowest inflation rate since February 2022, and further from the peak of 11.1% set last October. But it still leaves inflation well over the Bank of England’s target of 2%
Falling gas and electricity prices provided the largest downward contributions to UK inflation in July.
That’s because the UK’s energy price cap was lowered at the start of July, to £2,074 a year for a typical household, below the government’s energy price guarantee of £2,500 per year.
The GBP rallied vs the EUR, USD and other major currencies following the news that there was a decline in UK inflation, which fell notably in July as prices of milk, bread and cereals rose at a lesser pace in annual terms.
Inflation matched the economist consensus when falling from 7.9% to 6.8% for July on Wednesday as household energy costs declined and prices of items like milk, bread and cereals rose at a lesser pace than in the prior period.
Worryingly, core inflation was a little higher than hoped last month. Core inflation, which excludes energy and food prices, was unchanged at 6.9% and in contrast with economist forecasts for a decline to 6.8% due to increases in housing costs associated with rising mortgage interest rates as well as prices of hotels and passenger air transport
Wednesday data followed the release of other figures out on Tuesday showing average wage growth rising at a new record pace in July, leaving analysts and economists to reiterate forecasts for further increases in the Bank of England (BoE) Bank Rate over the coming months.
However, other factors like the rising unemployment rate, falling job vacancies, improving labour force participation and migration-fuelled growth in the workforce all suggested a limited lifespan for such rates of pay growth ahead even before the impact of sharply increased interest rates is felt by companies and mortgaged borrowers.
This morning also saw the release of EU GDP figures, which came in exactly as forecast at 0.3% increase QoQ and 0.6% increase YoY. Following this, there was little reaction to the GBP/EUR, which continued its bullish start to Wednesday trade around 1.1670; with little sign of retracement, even with the falling CPI print.
On the USD, this evening the FOMC minutes will be released and investors will be reading them to look for any clues as to how long the Fed will take before cutting rates. Short-term interest rate markets are currently seeing the first rate cut coming from the Fed around May next year and the September rate meeting is seen as a hold. In fact, short-term interest rate markets are not seeing any further hikes from the Fed this year.
The above could act as a head wind for the GBP/USD rate, with many City Analysts predicting the USD to lose strength should the FOMC minutes be deemed dovish this evening.
EUR/USD is looking north toward 1.0950 in the European session on Wednesday. Mixed Eurozone GDP, employment and industrial production data fail to inspire the Euro, as the pair capitalizes on a broad US Dollar pullback in ‘risk off’ markets, which often favour safe haven currencies.
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