Markets React to Mixed Inflation Data and Economic Signals.

  • UK Inflation Hits Target: UK inflation reached the BoE’s 2% target for the first time in nearly three years, with consumer prices rising 0.3% in May, slightly below expectations.
  • Pound Gains on Services Sector: Despite lower overall inflation, persistent inflation in the services sector led to the Pound (GBP) edging higher against the Dollar (USD) and Euro (EUR).
  • BoE Rate Cut Unlikely: Concerns over sticky services-sector inflation suggest the BoE is unlikely to cut interest rates soon, offering some support for the Pound.
  • US Dollar Weakens on Retail Data: The US Dollar fell as retail sales data for May came in below expectations, raising concerns about consumer activity and potential Federal Reserve rate cuts.
  • Eurozone Inflation Rises Slightly: The euro area’s annual inflation rate increased to 2.6% in May 2024, up from 2.4% in April, but significantly lower than the 6.1% rate from a year earlier.

GBP: Pound Rises Despite Mixed Inflation Data

The latest UK inflation data has hit the 2% target for the first time in nearly three years, but the Pound (GBP) nudged higher due to persistent inflation within the services sector. This trend suggests the Bank of England (BoE) might hold off on cutting interest rates soon. The Pound to Dollar (GBP/USD) exchange rate increased slightly to 1.2715 from just above 1.2700, and the Pound to Euro (GBP/EUR) exchange rate moved to 1.1840 from 1.1830.

UK consumer prices rose by 0.3% in May, just below expectations, bringing the year-on-year inflation rate down to 2.0% from 2.3%, matching consensus forecasts. This is the lowest rate since July 2021 and meets the BoE’s target. The underlying inflation rate also dipped to 3.5% from 3.9%, the lowest since late 2021, aligning with market expectations. Monthly data showed a downward contribution from food prices, while fuel prices exerted upward pressure. Goods inflation fell to -1.3% from -0.8%, and the services-sector rate slightly decreased to 5.7% from 5.9%.

Concerns over persistent services-sector inflation are likely to deter the BoE from an early interest rate cut, offering some support for the Pound.

The Pound (GBP) gained against several peers yesterday afternoon, buoyed by a weaker US Dollar. In the absence of significant UK data, GBP traded based on external factors. The ‘Greenback’ tumbled, leading to risk-on support that boosted Sterling.

Despite speculation over potential UK inflation consequences, Pound gains were limited ahead of USD-negative retail data release. Heading into today, headline inflation was expected to be 2% for the year to May, within the BoE’s target range.

If consumer prices ease as predicted, the BoE might consider cutting interest rates sooner, complicating projections for an initial cut in August or September. This would contradict economists’ forecasts. Susannah Streeter, head of money and markets at Hargreaves Lansdown, commented:

“It doesn’t look like the Bank of England will join the celebratory party immediately and cut interest rates. Policymakers still have their eye on hot wage inflation, with earnings including bonuses still running at 6%, at the last count.”

On Tuesday afternoon, concerns were sidelined as the Pound capitalized on US Dollar weakness. Analysts predict Sterling’s volatility will persist this week due to inflation data, the BoE’s upcoming interest rate decision, and the state of UK politics. Shaun Osborne, Chief FX Strategist at Scotiabank, remarked:

“There is little staying power in gains which have struggled to hold after last week’s bearish close… It feels like the pound has more work to do to establish a base.”

USD: Weak Retail Data Weighs on Dollar

The US Dollar (USD) fell against most peers on Tuesday as disappointing retail data dampened ‘Greenback’ sentiment. Retail sales grew by just 0.1% in May, below the 0.2% forecast. The US Census Bureau attributed this weaker figure to declines in gasoline, furniture, and food and drink services sales.

Paul Ashworth, Chief North America Economist at Capital Economics, commented on the data:

“Maybe households aren’t quite as impervious to higher interest rates as we were beginning to believe. Admittedly, we don’t expect a full-blown slump in consumption but, at the margin, even a modest slowdown in consumption growth and consequently GDP growth too could be enough to tip a finely balanced Fed in favour of a rate cut in September.”

Despite recent strength from the Federal Reserve’s hawkish stance, the US Dollar could face headwinds if the Fed pivots dovish due to reduced consumer activity.

Later in the European session, US industrial production exceeded forecasts, growing by 0.9% in May. However, bearish sentiment among US traders limited potential gains as Fed Chairman Jerome Powell remained noncommittal following the latest inflation data.

Powell stated: “We need further confidence, more good inflation readings but won’t be specific about how many to start rate cuts.”

EUR: Eurozone Inflation Rises Slightly

GBPEUR retreated to around 1.1820 as the Euro recovered ground. There was evidence of stabilisation in the French bond market which underpinned the Euro and increased scope for a Pound correction after strong gains last week. Tomorrow we have ECB consumer confidence flash – exp at -13.5 compared to a  -14.3 reading last time out indicating a slightly more optimistic outlook from EU zone.

The euro area’s annual inflation rate increased to 2.6% in May 2024, up from 2.4% in April, according to Eurostat. This is a significant decrease from a year earlier, when the rate was 6.1%.

Similarly, the EU’s annual inflation rate rose slightly to 2.7% in May 2024 from 2.6% in April. A year earlier, the EU inflation rate was notably higher at 7.1%.

*All rates shown are indicative of interbank rates and should only be used for indication purposes only. It is important to note that foreign exchange rates fluctuate and that rates may vary depending on the amount and the base currency that is purchased or sold. Rates are correct as of 8:00am UK time. CentralFX are not responsible for the rates shown.