UK inflation beats, EZ construction sinks
Cable moved to session highs before handing it all back
after a forecast-beating inflation print that takes some of the pressure off
the Bank of England to cut rates. Inflation hit 1.8% in January, rising
from 1.3% in December and ahead of the 1.6% forecast. There
is a lot of noise here and indeed all this week with a slew of UK data, none of
which – except the PMIs on Friday – that tell us enough yet about the direction
of the economy.
The bulk of the increase came from higher petrol prices and
airfares falling less than they did a year before. It was the first
increase in the pace of inflation for six months and backs up the MPC’s
decision not to cut rates last month. However, this is not just an inflation
question. We need to see whether the positive survey data in the aftermath of
the Tory election win is maintained with PMIs this Friday
offering a big test for sterling bulls. And we must see whether positive
sentiment – soft data – translates into more positive hard data by way of GDP. Inflation remains below target but the BoE does not seem unduly
concerned by this. What the Jan decision makes clear is that the majority of
the MPC would prefer to keep their power dry vis-à-vis inflation as long as
economic activity does not start to stagnate too much.
GBPUSD pushed up towards 1.3030 but the rally
fizzled with little in the numbers to really indicate a change in direction by
the BoE. The pair has now retraced the move, heading back through 1.30 again to
1.2980. The gravitational pull of this level will require some significant
gear change in either the data, or more likely Brexit trade deal talks, to
shake off. Range-bound.
Meanwhile disappointing Eurozone data keeps rolling in.
Following the industrial production shocker, and German ZEW sentiment survey,
the latest is a dismal construction output print, which came in at –3.7%
in December year-on-year from +1.4% previously. Terrible but only
underscoring the sluggishness in the EZ economy. Both EURUSD and EURGBP are
vulnerable to further downside in the near-term although both pairs have eased
off their lows of the day.
Elsewhere, bond markets are not joining the risk rally
party today with yields sliding to session lows. That’ll be because
monetary policy expectations, which is exactly what’s lifting markets in Europe
to fresh all-time highs. Gold is reacting to this yield play as it should,
shooting up to $1609.80 to within a whisker of the recent multi-year highs at
$1611. USDJPY is pushing higher, breaking the near-term
resistance at the Jan swing high at 110.20 to trade at session highs. With this
level cleared we can now look to the May peak at 110.70 before a move back
to the big 50% retracement at 112.70.