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Sterling slides on stronger dollar, below-forecast UK wage growth

Sterling slid to a new 13-month low on Tuesday after a rebound in the dollar and as weaker-than-forecast wage growth offset an unexpected fall in Britain’s unemployment rate.

The pound had risen to as high as $1.2827 after official data showed unemployment fell to its lowest rate since 1975 during the second quarter.

But sterling trimmed its gains after annual wage growth – at a nine-month low of 2.4 percent and below forecasts of 2.5 percent – diluted the positive employment numbers.

A recovery in the dollar then sent sterling lower, leaving it as weak as $1.2705, its lowest since late June 2017.

Against the euro, sterling was stronger, at 89.175 pence per euro.

The Bank of England has said it wants to see rising wage growth pressures if it is to speed up its planned rate of monetary policy tightening.

Sterling fell heavily last week, hammered by a stronger dollar and concerns about the state of negotiations with the European Union over a trade deal for when Britain leaves the bloc. Foreign minister Jeremy Hunt added his voice on Tuesday to recent warnings about the prospect of a disorderly departure.

“Everyone needs to prepare for the possibility of a chaotic no-deal Brexit,” he said.

The direction of monetary policy following a Bank of England interest rate rise earlier this month has recently taken a backseat against market worries about Brexit.

BoE Governor Mark Carney said markets should prepare for further rate hikes, although borrowing costs would increase to a gradual and limited extent and depend on a smooth Brexit transition.

“Today’s wage growth figures could undermine this, particularly with the increasing threat of a no-deal Brexit. Should this happen, the bank’s next move could be to reverse their most recent rate decision and cut rates to keep the economy afloat,” Felix Blom, a researcher at forex payments platform OFX, said.

UK inflation data and retail sales numbers for July are also due out this week.

Source: UK Reuters

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Tame UK inflation knocks BoE rate hike expectations

British inflation unexpectedly held steady last month, denting market confidence about a Bank of England interest rate hike next month and sending sterling to a 10-month low against the dollar.

The pound tumbled towards $1.30 and 10-year British government bond yields GB10YT=RR fell to their lowest since the end of May following the data, which also showed weakening in an underlying measure of inflation.

Despite motor fuel prices rising to their highest since 2014, annual consumer price inflation held in June at 2.4 percent, the Office for National Statistics (ONS) said.

Economists polled by Reuters had on average expected to see the first increase this year, to 2.6 percent.

Britain’s economy appears to be picking up after a slow first three months of the year, when unusually heavy snow hurt demand.

While the central bank worries that growth is close to the modest pace at which it will start to push up inflation, Wednesday’s data brought little sign of this.

Core inflation, which strips out energy, food, alcohol and tobacco prices, fell to 1.9 percent from 2.1 percent in May — below all forecasts and the weakest reading since March 2017.

“The large downside surprise adds more uncertainty around what had until now appeared a near-certain August rate hike,” JPMorgan economist Allan Monks said.

Comments from BoE officials over the next week could be a “game changer”, Monks said, drawing parallels with May, when a spate of poor data thwarted a widely expected rate hike.

One measure of financial market pricing after Wednesday’s figures showed a roughly 70 percent chance of a move next month compared with nearly 80 percent before BOEWATCH.

PRESSURE IN THE PIPELINE?

On Tuesday data showed British workers’ wages rose at the slowest rate in six months during the three months to May despite a record number of people in jobs, challenging the BoE as it considers raising rates next month.

A Reuters poll of economists published on Tuesday showed 47 out of 75 thought the BoE would raise rates to a new post-financial crisis high of 0.75 percent in August. The remainder thought it would stay on hold. [BOE/INT]

Some economists said the weakness in June’s inflation data was driven by volatile components such as clothing, computer games and air fares which could soon rebound.

The ONS reported the biggest month-on-month drop in clothing prices for any June since 2012 as shops slashed prices for the summer sales.

Wednesday’s data suggested rising pressure in the pipeline for consumer prices, however.

Manufacturers increased the prices they charged by 3.1 percent in June compared with 3.0 percent in May. While a slightly weaker increase than expected, it marked the strongest rise this year.

The cost of raw materials – many of them imported – was 10.2 percent higher than in June 2017, the strongest rise in a year.

“The continued pick-up in producer prices suggests that inflation may rise a little in the short term as the recent oil price increases pass through supply chains,” said Suren Thiru, head of economics at the British Chambers of Commerce.

But any period of rising price growth was likely to be temporary, he added.

Source: UK Reuters

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Surprise fall in UK inflation muddies Bank of England rates picture

British inflation fell unexpectedly in April, according to data that prompted fresh questions about when the Bank of England would next raise interest rates and pushed sterling to its lowest level against the dollar this year.

Consumer prices rose by an annual 2.4 percent, the Office for National Statistics said on Wednesday, marking a 13-month low as the timing of the Easter holidays meant air fares pushed down on inflation last month.

Although the BoE had expected inflation to ease in April, most economists in a Reuters poll thought it would hold steady at 2.5 percent and some had forecast a rise. It was the second surprise fall in a row after a drop in March’s figures.

“With consumers remaining cautious and borrowing appearing to have fallen substantially, a rate hike over the next few months is certainly not a done deal,” ING economist James Smith said.

Investors priced in a one-in-three chance of the BoE raising borrowing costs in August — the next time it updates its economic forecasts — down from 50/50 earlier this week.

Two weeks ago the BoE refrained from a hike that had at one point been widely expected as it waited to see if the economy’s weak start to the year simply reflected heavy snowfall.

A Reuters poll of economists, conducted before Wednesday’s data, showed most still expected an August hike. [BOE/INT]

High inflation, caused by the pound’s drop after the 2016 Brexit vote, squeezed British consumers last year. Although it has receded from its November peak of 3.1 percent, it is running above the BoE’s target of 2.0 percent.

On Tuesday, Bank of England Governor Mark Carney cited a new sugar tax on soft drinks, as well as higher utility bills and petrol prices, as reasons why inflation in Britain “probably tips up a bit” in the coming months before resuming a decline.

The ONS said soft drink prices rose sharply over the last couple of months but the overall impact on inflation was small.

Data last week showed inflation in the euro zone also slowed in April.

Wednesday’s figures pointed to some signs of inflation pressure still in the pipeline in Britain.

Prices of goods leaving factories increased at a faster rate than expected last month and the cost of raw materials — many of them imported such as oil — was 5.3 percent higher than in April 2017, up sharply from an increase of 4.4 percent in March and suggesting a long run of weakening price growth has ended.

Source: UK Reuters