Sterling took a tumble on Tuesday after Bank of England officials appeared more cautious than anticipated in supporting policy tightening even as UK inflation rose to a 5½-year high in September. The US dollar enjoyed a second day of solid gains as investors speculated that President Trump was considering appointing an inflation hawk as the next head of the US Federal Reserve. The euro meanwhile remained subdued as renewed political risks continued to weigh on the currency.
It was a busy session for European data, with UK inflation being the highlight. British consumer prices rose by an annual rate of 3.0% in September – up from the prior 2.9% and the highest since April 2012. The figure was in line with expectations and at the upper limit of the Bank of England’s 1% band around its central target of 2%. Core inflation was unchanged at 2.7%, as expected, though the month-on-month rate rose by a smaller-than-forecast 0.2%.
The pound firmed to $1.3287 in the run up to the data but quickly lost momentum as BoE policymakers began appearing before the Treasury Select Committee in Parliament today. The Bank’s newest Deputy Governor, Dave Ramsden, cast doubt about the need for higher interest rates, saying he wasn’t part of the majority of MPC members at the August meeting who saw a case for a rate hike in the coming months. Another new MPC member, Silvana Tenreyro, said a premature rate increase could be "costly" but would vote for a rate hike if incoming data warrants it.
BoE Governor, Mark Carney, also surprised traders by giving only a cautious support for tighter policy. Carney said he would vote for a rate rise if the output gap continues to close in the coming months. But the lack of a stronger signal for a November move disappointed investors who have priced in a 0.25% hike at the next meeting.
Sterling plunged below the $1.32 level after the remarks, hitting a session low of $1.3165. The British currency briefly stabilized after the Brexit minister, David Davis, told Parliament the UK is not planning to walk away from the Brexit negotiations and urged EU leaders to approve accelerating the talks at the bloc’s summit later this week.
Other data out of Europe today included the German ZEW business survey and the final reading of Eurozone CPI. Germany’s ZEW economic sentiment index missed forecasts of 20.0 but still managed to improve from September’s 17.0 to 17.6 in October. The current conditions gauge also missed estimates, falling to 87.0 in October from the prior 87.9. Analysts were expecting a figure of 89.0.
The euro slipped further after the data, touching a fresh one-week low of $1.1734 in afternoon European trade. There was little reaction to Eurozone September inflation numbers, which were left unrevised at 1.5% and 1.3% year-on-year for the headline and core rates respectively.
The greenback had a better session, with both dollar/yen and the dollar index posting gains. The dollar index stood 0.3% higher at 93.60 at the US open, while against the yen, the dollar traded around 112.30.
A report by Bloomberg that President Trump was impressed by Stanford University economist John Taylor at an interview last week led market participants to place him as the top contender for the next Fed chair. However, more important could be the outcome of Trump’s meeting with current chair, Janet Yellen, on Thursday. If Taylor, who advocates higher rates, remains the favourite to take over the helm of the Fed in the coming days, the dollar could see further gains.
US bond yields have already been boosted by the prospect of a more hawkish Fed chair, with the 2-year yield on Treasury Notes jumping to a nine-year high of 1.554% today.
Further boosting the dollar today were positive data out of the US. Import prices rose by a bigger-than-expected 0.7% month-on-month in September, beating forecasts of 0.5%. Industrial production also came in above estimates, with output expanding by 0.3% m/m in September, versus forecasts of 0.2%. It compares with an upwardly revised -0.7% in August.
In other currencies, the Australian dollar remained in the red, extending its losses in European trading to hit a new intra-day low of $0.7822. Its kiwi counterpart also came under pressure from the stronger greenback despite stronger-than-expected inflation data out of New Zealand today. The kiwi fell to around $0.7150 in late session, having earlier touched $0.72. A 1% drop in dairy prices at the latest bi-weekly global dairy auction did not help the New Zealand currency either.
Major commodities also fell back, with oil prices unable to top yesterday’s 2½-week highs, while copper gave way to profit taking after recent sharp gains. WTI oil was last trading at $51.94 a barrel and Brent crude at $58.10 a barrel, as ongoing fighting between Iraqi and Kurdish forces in Iraq’s oil-rich Kurdistan region supported prices. Copper slid 1% to $3.19 per tonne, taking a respite after a 4% surge over the past week.
Gold declined for a second day, to around $1285 an ounce in late session, coming under pressure from the stronger dollar.
