Pound Falls as Inflation Falls to a 13 Month Low

Source: Forex News

Yesterday, the UK parliament held its inflation hearings with the Bank of England (BOE) officials. The meeting resulted in a few headlines with the main one being the hawkishness of key officials. One of them said that he expected the central bank to hike 6 times in the next three years. As a result, the pound jumped against the peer currencies including the dollar.

Today, the pound gave up those gains as the Office of National Statistics (ONS) released the inflation numbers which continued the trend started in January. Data from the agency showed that the rate of inflation rose at an annualized rate of 2.4%, which was lower than last month’s 2.5%. Traders had expected the inflation rate to remain steady at 2.5%. The current CPI is the lowest in 13 months.

In December, the rate of inflation – as measured by the CPI – rose at an annualized rate of 3.1%, beating the estimates’ 3.0%. This was the highest rate since 2010. In the following month, the pound continued to soar as investors expected the BOE to be more hawkish. The officials confirmed this in their February meeting where they projected more hikes this year. But, the data in the coming months continued to disappoint. In January, February, March, and April, the CPI rose by 3.0%, 3.0%, 2.7%, and 2.5% respectively. Since January 2016, the CPI has managed to recover from negative 0.1% to the 3.1% in December last year. This was attributed to the BOE’s easy money policies.

On a MoM basis, the inflation in the country rose by 0.4% which was lower than the expected 0.5% but higher than last month’s 0.1%. The Core CPI which excludes the volatile food and petroleum, prices rose by 2.1%, which was lower than the expected 2.2%. At the same time, the Producer Price Index (PPI) which measures the change in the price of goods and raw materials purchased by manufacturers rose by an annual rate of 5.3%. This was lower than the expected 5.5%. The PPI is also a measure of inflation.

The current data removed the likely chances for Bank of England to hike rates in September. A survey by Bloomberg showed that investors had reduced their bets on BOE rate hike to just a third. Previously, their probability for this hike was more than 70%.

The reduced inflation coming at a time when wages in the country are rising is a good thing for the consumers. The weaker pound is also a good thing for the country’s manufacturers and other businesses, but negative for importers.

The continued pound weakness will likely continue as the country battles with the European Union on the customs union issue. In Theresa May’s cabinet, divisions have emerged, which is threatening a hard landing. Yesterday, Governor Mark Carney said that Brexit had already reduced the average household earnings by more than 90 pounds.

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