Daily Market Update

Sterling Rallies to One-Year High on Inflation

September 12, 2017

The U.S. dollar modestly extended yesterday’s gains against most of its major counterparts, save the British pound. The Bloomberg Dollar index gained 0.6% on Monday and is up only 0.1% at the time of writing today.

USD

The U.S. dollar modestly extended yesterday’s gains against most of its major counterparts, save the British pound. The Bloomberg Dollar index gained 0.6% on Monday and is up only 0.1% at the time of writing today.

The greenback continued its rebound against safe-havens, namely the Japanese yen, after the United Nations Security Council approved new sanctions against North Korea. The U.S. was forced to drop its demands for an oil embargo to appease China and Russia, who both have veto-power.

Once again, there is no major economic data on today’s docket so the greenback will take its cues from abroad. Thursday’s consumer price index and Friday’s retail sales will set the tone for the second half of the week.

 

EUR

After falling yesterday, the Euro was unable to rebound overnight even as economic data showed an improving labor market. Italy’s unemployment rate fell to 11.2%, beating forecasts for an 11.3% reading. French private payrolls also rose and beat expectations.

It is our belief that the EUR/USD cross is attempting to establish new, higher ranges after the Euro reached a 2.5 year high against the U.S. dollar last week.

 

GBP

The British pound surged to a one-year high against the U.S. dollar, bucking the two-day positive trend for the greenback. The sterling rose across the board after U.K. inflation accelerated more than forecast, putting the Bank of England in tricky spot. Consumer prices rose an annual 2.9% in August, beating expectations of a 2.8% rise and well above the Bank of England’s 2.0% target. Core inflation also rose to the highest level in six years.

The Bank of England is set to meet on Thursday. While we do not expect the central bank to boost rates this week, debate may heat up as inflationary pressures rise. The chances of a Thursday rate hike are currently at 7%, up from 5% before the data. There is a 33% chance the BoE will find the scope to raise rates by the end of the year, boosting the currency. If inflation reaches higher than 3%, BoE Governor Mark Carney would have to write a letter to the government explaining why inflation is so far above the 2.0% target.

In other news, the U.K. parliament voted to lets Prime Minister Theresa May’s Brexit law advance. The successful vote was widely expected but the margin was rather thin.

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