Disappointing UK inflation causes GBP slump

Markets were not impressed by yesterday’s UK inflation data for July, which showed consumer price growth remains too weak to prompt monetary tightening, but too strong for household budgets to easily absorb.

The pound continues to extend losses this morning, with GBP/EUR trending at €1.0956 and GBP/USD down slightly on opening levels to US$1.2857. GBP/AUD is recording stronger losses at AU$1.6407, GBP/NZD has slipped to NZ$1.7766, and GBP/CAD has softened to CA$1.6402.

Read on to discover how today’s UK wage growth data could shake the pound...

What’s been happening?

UK inflation data was disappointing yesterday, although this was likely given the position consumer price growth was left in last month. Holding steady at 2.6% year-on-year was a surprise for the overall index, which had been forecast to creep up to 2.7%.

This leaves household shopping bills climbing significantly faster than wages are growing, but with plenty of breathing room for the Bank of England (BoE) before they feel the pressure to hike interest rates.

Therefore the outlook for both interest rates and the UK economy remains gloomy, so the pound unsurprisingly slumped.

The pound’s losses against the euro were muted by the fact the latest US data had increased demand for the US dollar, leaving EUR unappealing. German GDP data printed solidly, showing 0.6% growth on the quarter in Q2; while ten basis points lower-than-forecast, Q1’s growth rate was revised up by the same amount to 0.7%.

US advance retail sales data showed 0.6% growth - double what had been forecast. This ignited strong demand for the US dollar and pushed odds of an interest rate hike in December up to 50.4%.

What's coming up?

It will be another interesting day of data today, with important releases due from the UK, Eurozone and the United States.

The UK’s average weekly earnings figures for the three months to July will give an indication of how well households are likely to be able to cope with rising inflation. Slowing or stagnant wage growth will further sour appetite for the pound.

Italian and Eurozone GDP estimates for the second-quarter are due out today and are expected to largely print positively.

The Federal Open Market Committee (FOMC) July meeting minutes are set for release this evening. If policymakers still seem concerned about the weakness of consumer price growth, the US dollar could tumble; especially given that inflation further disappointed after the meeting took place.

We’re here to talk currency whenever you need us, so get in touch if you want to know more about the latest news or how it could impact your currency transfers.

Phil McHugh,
Trading Floor Manager

Phil provides dealing and hedging services whilst also helping to manage Currencies Direct overall market exposure.