Pound volatility expected on UK inflation report

The UK’s long-term economic and interest rate outlook was in focus yesterday, because an empty data calendar gave markets nothing else to think about. The pound is inching off the starting blocks this morning ahead of the day’s key UK inflation data.

GBP/EUR is trending at €1.1021, while GBP/USD is at $1.2961. Sterling remains flat against the commodity currencies as well, with GBP/AUD at AU$1.6516, GBP/NZD at NZ$1.7769, and GBP/CAD at C$1.6510.

With the consumer price index just around the corner, sterling is in for a volatile day. Read on to find out what is most likely to happen when the data is released…

What’s been happening?

Not much. The markets were rather sluggish yesterday, with a lack of UK data leaving Sterling largely on the decline versus its peers.

This left markets focusing on the general gloom surrounding the UK economic and interest rate outlook; the presence of today’s key inflation data was also a factor keeping GBP unappealing, as many are waiting for the results before deciding whether or not to buy or sell the currency.

The euro was on mixed form - advancing versus the risky commodity currencies but falling against the safer-havens - which prevented GBP/EUR from falling below opening levels. A poor set of industrial production figures from the Eurozone helped the pound to cling to the day’s starting levels.

Seasonally-adjusted production fell -0.6% instead of the forecast -0.5%, while year-on-year production slowed from 3.9% to a below-forecast 2.6%.

There was nothing of note on the US data calendar, yet the US dollar continued to enjoy strong demand yesterday. This pushed GBP/USD lower.

What's coming up?

It will be a busy day today in terms of high-impact data releases.

The Eurozone has kicked things off with German GDP estimates for the second-quarter. These have shown weaker-than-expected growth on the quarter and on the year, but an enormous revision in year-on-year GDP during the first quarter from 1.7% to 3.2%.

UK consumer price growth data will be released later this morning and is expected to show that core price growth accelerated from 2.4% to 2.5% and overall price growth climbed from 2.6% to 2.7%.

This is unlikely to cheer the markets; if the Bank of England (BoE) didn’t feel pressured to hike interest rates when overall price growth was at 2.9% then it won’t budge interest rates if inflation hits 2.7%.

However, 2.7% is still a strong rate of price growth - one that UK households are struggling to cope with. The outlook for the UK economy therefore remains uncertain.

The US will round off the day’s high-profile economic data releases with advance retail sales data for July.

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.