Sterling weakens as inflation returns to negative

Enrique Díaz-Álvarez14/Oct/2015Currency Updates

The Pound lost ground against its major peers yesterday after inflation in the UK returned to negative territory in September. This is only the second time this has happened in the last half a century. The disappointing report from the ONS continues to push back market expectations for an interest rate hike in the UK further into 2016.

Attention among traders today will again be on data in the major economies. Wage growth and unemployment in the UK this morning, industrial production in the Eurozone and the release of the latest retail sales figures from the US Census Bureau will all be in sharp focus.


Sterling declined by 0.8% versus the Dollar and fell to its weakest position against the Euro in five months yesterday.

Gains for the Pound as markets opened were completely wiped out after price growth in the UK unexpectedly returned to negative for the second time this year. Consumer prices declined by 0.1% from a year previous and continue to be driven lower by falling fuel prices, combined with a smaller than usual increase in clothing prices. This means that inflation in the UK economy has now remained around static for the past eight months. Core inflation was unmoved at 1%, with the retail price index, which includes house price growth, registering a below forecast 0.8%.

Such weak inflation will not be good news for Bank of England hawks, and provides a further indication that rates in the UK are unlikely to rise until the second quarter of next year at the very earliest. A delayed Bank of England hike will likely weigh on the Pound in the short term and push back the currency’s expected rally.

The latest wage growth and unemployment figures from the ONS at 9.30am this morning are likely to be the biggest domestic news out of the UK economy today. Earnings are expected to increase further above inflation, with unemployment forecast to remain unchanged. An improvement in labour market conditions remains key to the timing of a Bank of England rate hike.


The single currency continued to defy expectations yesterday, appreciating by 0.15% against the Greenback to its strongest position since mid-September.

Yesterday’s rally in the Euro came in spite of some rather disappointing economic sentiment data. Eurozone sentiment continued to decline according to ZEW, with their monthly index falling by 33.1 to 30.1. More worrisome, the German index, which measures optimism among investors, tanked to its lowest level in twelve months in October, down by 10.2 points to 1.9. Concerns surrounding the ongoing scandal at Volkswagen, coupled with a slowdown in the global economy, were the main driving forces behind the disappointing data.

Earlier in the day, inflation in Germany remained unrevised at 0% year-on-year in September, while the wholesale price index in Europe’s largest economy fell by its most since February.


The recent recovery in emerging market currencies took a breather yesterday, with the US Dollar experiencing gains across the board. The US Dollar index increased by 0.1%.

We also saw yet another speech from a Federal Reserve member regarding the appropriate timing of a Federal Reserve interest rate lift-off. St. Louis Fed President James Bullard claimed that he opposed the decision to hold-off in September, although stated, in line with our view, that economic data since has not been sufficient to push the Fed towards a hike when in next meets at the end of this month. On the hawkish side, he also suggested that markets were ready for a hike and that low inflation could not justify staying at near zero rates.

Yesterday was another light day of data after Monday’s US bank holiday. Small business optimism did, however, surprise on the upside. The monthly measure from NFIB increased from 95.9 to 96.1 and suggests moderate growth in the sector.

Focus today will be on the much scrutinised measure of retail sales for September, released at 1.30pm this afternoon.

Rest of the world

More weak import data in China yesterday caused a host of emerging market currencies to decline against the Dollar. The Brazilian Real, Colombian Peso, Indonesian Rupiah and Russian Rouble all fell by more than one percent during London trading.


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Written by Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.