Daily Brief – Markets In Reverse – Inflation to the Rescue

Markets In Reverse – Inflation to the Rescue

Particularly in the case of the beleaguered GB Pound, it may be time to do away with the textbook. Instead of attracting further demand as UK yields have risen, GBP has registered one of its worst starts to a year on record. It is a narrative of fear and fiscal imbalance that has driven the Pound lower, severing the typically positive causation between the currency and bond yields. The almost exclusive focus upon the fixed income market by Sterling traders was reinforced during yesterday’s publication of UK CPI inflation.

UK CPI inflation had been expected to record in line with its previous reading at 2.6% year-on-year, consistent with a reading of 0.4% month-on-month. Monthly and annual figures both recorded 0.1% shy of their forecasts at 0.3% and 2.5% respectively. Evidence of falling inflation is expected to restore some appetite amongst investors to hold UK gilts, the price of which has been pummelled in recent sessions. Accordingly, as bond yields fell Sterling was able to rise stemming further losses from the currency. The Bank of England’s more closely watched measure of core inflation also fell disproportionately to headline inflation, helping to arrest the slide in GBP.

Later in yesterday’s session, US CPI inflation also played out favourably for orderly market conditions. Year-on-year core inflation recorded at 3.2% versus 3.3% prior and expected. The data received by the market yesterday proved insufficient to create any meaningful reversal of recent trends. However, it was likely a major contributing factor to a pause in the flight to the Dollar. Data will remain heavily in focus as this week progresses with salient USD and GBP data due today and tomorrow. 

Discussion and Analysis by Charles Porter

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