UK Inflation Slips to Three-Year Low
Expectations of a Bank of England (BoE) interest rate cut were already ramping up before it was revealed that UK inflation fell to a three-year low in December. The consumer price index (CPI) rose 1.3% last month compared to a year earlier – this represents the weakest reading since November 2016, according to official data released by the Office for National Statistics yesterday morning. As inflation slips further away from the BoE’s official 2% target, speculation about an imminent rate cut by its monetary policy committee intensifies. The pound to US dollar rate briefly dropped below the 1.30 level, before regaining its footing.
The BoE has sat on its hands since August 2018, leaving interest rates unchanged at 0.75%. However, the pressure is building on the Bank to stimulate the economy ahead of its January meeting, following a string of disappointing data releases.
US and China Sign Phase One Trade Deal
US producer prices ticked up slightly in December, as a rise in the cost of goods was offset by weakness in the services sector. The news provided the latest indication of mild inflation pressures that might allow the Fed to keep interest rates on hold this year. The dollar was little moved by the Producer Price Index, as investors awaited the signing on of a phase on trade deal between the US and China.
Donald Trump and China’s vice-premier Liu He have taken a huge stride towards diffusing an 18-month trade war, by finally signing a phase one deal. The agreement is expected to cool trade tariff tensions that have shaken markets and weighed on the global economy. While the partial deal provides some relief, uncertainty remains. So, it came as little surprise when the dollar was relatively unmoved by an event that had already been priced into the market. After a brief spell of backslapping, attention will turn to the timetable for phase two of the negotiation process.
Looking Ahead
The weak CIP reading brings Friday’s Retail Sales release into sharp focus, which investors in the pound will be hoping provides BoE monetary policymakers with some economic optimism.
A busy day in the US sees the release of Retail Sales (excluding autos) numbers, the Philadelphia Fed Manufacturing Survey, the Retail Sales Control Group and the Initial Jobless Claims 4-week average. This is followed by Building Permits, Housing Starts, Industrial Production and the Michigan Consumer Sentiment Index on Friday.
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