Monday, August 17, 2015

Sterling flat in the dog days of summer | UK Inflation figures today are crucial

While the British pound against the US dollar enjoyed some sweeping moves during March, April, May and June, it has been in something of a sideways pattern for most of July and so far in August (see chart).

Of course we are in summer trading mode at present, and this could be affecting the situation.

While Cable (GBPUSD) was not as susceptible to the volatility that the Single Currency experienced as a result of the on-again, off-again negotiations between Greece and its creditors, it was nevertheless impacted. This is because there was a certain amount of safe-haven buying of Sterling. This alone made it one of the strongest performers on the global Forex stage during the period when Greece was to the fore.

Adding in the fact that the fundamentals in the UK economy are sound make its currency attractive. Employment and wages are up, consumer spending is healthy and GDP is holding, all of which have given rise to some chatter about the likelihood of the Bank of England being on course to raise interest rates, which would be the biggest positive of all for the currency.

Inflation figures today are crucial

There is one cloud on the horizon, however, and that is inflation expectations, or rather the lack of them. Later today we will have Consumer, Producer and Retail Price Index figures for the UK. The price of oil resumed its fall during July and August and this is not good for the rise in inflation of in the order of 2% that central bankers all over the world like to see. The UK is also a producer of oil and gas, so the drop in energy prices is not calculated to assist GDP figures either, although the energy part of the economy is not as important as it once was.

Flat or falling inflation will, once again, discourage Mr. Carney and his colleagues at the BoE from raising interest rates.

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