Cable Cracks as UK CPI Cools Markedly

Market Drivers August 19, 2014
UK CPI Much cooler Cable tumbles through 1.6650
RBA Minutes suggest further easing unlikely
Nikkei 0.83% Europe 0.44%
Oil $96/bbl
Gold $1300/oz.

Europe and Asia:
NZD PPI -1.0% vs. 0.7%
EUR CA 13.1B vs. 19.2B
GBP UK CPI 1.6% vs. 1.8%

North America:
USD CPI 08:30
USD Building Permits 8:30

UK CPI printed much cooler than expected shattering expectations of an early rate hike from the BoE and sending cable tumbling nearly 100 points off session highs. The UK CPI came in at 1.6% versus 1.8% eyed remaining well below the 2% benchmark as it missed forecasts for second month out the past three.

The biggest decliners in the CPI complex were clothing and footwear which fell -5.7% versus a gain of 0.6% in June. Furniture and equipment costs were lower as well by -1.5% versus 0.1% the month prior. Producer prices were lower as well with PPI declining -1.6% versus -1.1% expected.

The news on the inflation front destroyed any hopes of BoE rate hike in the foreseeable future despite relatively hawkish remark this weekend by UK central bank governor Mark Carney which suggested that the BoE may not wait for wage gain before embarking on normalizing monetary policy. In fact Mr. Carney suffered tremendous damage to his reputation today as the data in UK shows that price pressures are non-existent on both the wage and cost of goods fronts and the BoE has absolutely no reason to act anytime soon.

Given the current disinflationary conditions the BoE is unlikely to even consider rate hikes until Q2 of 2015 and that is likely to put further pressure on the pound as traders adjust their expectations. Sterling fell through the 1.6650 support as it once again tested the 200 period moving average and could test the 1.6600 level later in the day as shorts press their case.

Elsewhere in Asia the kiwi and Aussie went their separate ways as New Zealand PPI data printed much weaker than expected while RBA minutes suggested that any further easing is unlikely. In New Zealand the PPI data printed at -1.0% versus 0.7% forecast and traders awaited the price of the new dairy auction due sometime at 1300 GMT. The decline in dairy prices has been a key contributor to lower prices this year and has been a main drag on the kiwi which once again probed the 8400 figure in overnight trade.

Aussie on the other hand bucked the trend and headed higher towards 9350 as the release of RBA minutes talked about the fact the rates on housing and business loans continued to fall suggesting that monetary conditions were already at a noticeably easy level. The AUD/NZD cross tested the multi-week highs at 1.1050 and could climb towards the key 1.1100 mark if New Zealand dairy auction results prove disappointing.

In North America today, the calendar is relatively light with housing and CPI data on tap. A rebound in housing data could provide the dollar with a modest boost and could push USD/JPY towards 103.00 figure as the dollar continues to benefit from relative strength flows. With summer vacation season in full bloom however, the price action is likely to remain subdued.