Sterling fell to its lowest level against the dollar since September 2017 after lower than expected UK CPI data for June.
Headline CPI was 2.4% versus a 2.6% expected, while core CPI came in at 1.9% compared to 2.1% forecast, a 15-month low. Clothing and footwear prices fell by -2.1% between May and June, the biggest decline for the month since 2012, with the ONS reporting a greater incidence of discounting (early summer sales).
This is the most important data print before the Bank of England’s August 2nd monetary policy meeting. The concern is whether the disappointing inflation data will force the markets to question the current pricing for an August rate hike. BoE Governor Mark Carney and the rest of the MPC have set up expectations that it is ‘full steam ahead’ for a summer hike. Given the disappointing inflation data, the implication is that even if there is a hike, it could be a dovish one.
GBPUSD dropped to a 10-month low at $1.3000 after the CPI data and was already under pressure ahead of the report. The pound has been vulnerable to Brexit-related headlines and the domestic political situation.
Prime Minister Theresa May’s Brexit plans had been savaged by critics on all sides after the meeting at Chequers earlier this month, resulting in Foreign Secretary Boris Johnson and Brexit Secretary David Davis resigning in protest to May’s White Paper on the UK leaving the EU. For now May has saved herself from what would have been a catastrophic defeat in some crucial votes that took place this week in Parliament.
Since an August rate hike is not a done deal, especially as the political outlook is still clouded, the pound could remain under pressure in the near term.
Pound under pressure after UK CPI data
Market Trends - 18/07/2018