UK: Extension of Sterling's Recovery - BBH
Research Team at BBH, suggests that the highlight in the foreign
exchange market today is the extension of sterling's recovery.
“It began yesterday with a bout of short-covering, but the extension today was sparked by higher than expected inflation. Consumer prices rose 0.4% in March, lifting the year-over-year rate to 0.5%, the highest since the end of 2014. CPI stood at 0.3% in February. Core prices rose to 1.5% from 1.2%, the most since October 2014. The median forecast from the Bloomberg survey was 1.3%.
The details warn that the headline may have been flattered by the early Easter and other base effects. Airfare, for example, rose 23% in March compared with a 2.2% increase in March 2015. Footwear rose 1% after falling in March last year. Separately food prices fell, and petrol rose less than a year ago. Nevertheless, it does appear that inflation in the UK has bottomed. Service prices rose 2.8% year-over-year while goods prices are off 1.6%. The weakness in sterling may spill over and underpin prices in the goods sector going forward.
The fact that sterling rallied on the data would seem to undermine explanations offered in some quarters that the yen's rise and/or the dollar's decline reflect investors focusing on real rather than nominal rates. The Bank of England meets later this week. Policy remains steady. Brexit risks loom on the horizon, and the economy appears to have lost some momentum.
Sterling has been mostly confined to a $1.40-$1.45 range since early March. We suspect that those who are concerned about Brexit risks are content to be patient and look for better levels to sell sterling. We expect the upper end of this range to hold.”
(Market News Provided by FXstreet)