Pointing out the heightened sensitivity of markets to data recently was if anything an understatement. Yesterday, prices fluctuated wildly following the release of inflation data in the United States. By way of an early reminder, similarly salient data is due out in the UK later this week and early next. Inflation data is arguably one of the most important statistics that can impact the value of a currency. That is true in this current market environment because it is interest rate differentials that are the key driver of currency valuations in this time of pervasive inflation concerns. Inflation being the target of interest rate control there demands huge scrutiny over the price level in an economy.
The Dollar’s fortune has been changing in line with the evolving median perception of something being labelled ‘peak Fed hawkishness’. This refers to the paradigm in which the Federal Reserve monetary authority has been ahead of market expectations coming to an end. This is where the markets ever more generous pricing of USD would begin to come to an end also as interest rate expectations begin to fall rather than continuing to rise exponentially. The debate surrounding peak hawkishness has largely been driven by the discourse coming from Reserve members. However, this was in lieu of inflation data for markets to form more developed expectations of their own.
Yesterday’s data showed CPI inflation coming in at 8.5% year on year for July versus an expected figure of 8.7% and previous figure in June of 9.1%. Core inflation also displayed an unchanged figure versus June despite markets having forecast a 0.2% increase. The usually less salient month on month data was arguably even more surprising with significant decreases in inflation versus previous observations and expectations. Markets digested this data by assuming that if inflation is coming down sooner than expected then interest rates will likely not have to rise as high or as fast as they would have done if inflation was still accelerating. The Dollar closed European trading down around 1.5% across the board.
Discussion and Analysis by Charles Porter
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Germany The German business climate was slated to rise in July but instead it fell in terms of both current and also future expected business conditions as reflected in the IFO Index made up of manufacturing, services, trade and construction sectors as submitted by 9000 firms. Germans wishing doubtlessly that they could be as strongly […]
UK Energy Apart from announcing that there will be no further North Sea drilling licences issued, newly minted Uk Energy Minister Ed Miliband has wasted no time in greenlighting three huge new solar farms in Lincolnshire, Cambridgeshire and Suffolk. Sufficient to power 400,000 homes with an output of 1.4 GW the solar farms will cover […]
British Pound GBP is currently in fashion: with a record number of long positions and currently at the top of the G7 currency performance charts and after a period of being deeply unfashionable GBP is wanted-in a good way. The reasons for this are diverse: first off is the Bank of England’s caution on cutting […]