Cable Hits 10 Month Lows as Core CPI Dips Below 2%

Market Drivers July 18, 2018
Sterling tests 1.3000 off weak inflation data
EZ CPI in line
Nikkei 0.43% Dax 0.83%
Oil $67/bbl
Gold $1222/oz.
Bitcoin $7300

Europe and Asia:
GBO UK CPI 1.9% vs.2.2%
EUR EZ CPI 2.0% vs. 2.0%

North America:
USD Housing Starts 8:30
USD Fed Chair 10:00

UK CPI printed considerably cooler than expected sending cable to 10-month lows in morning London trade.

Cable hit a low of 1.3020 holding just above the psychologically important 1.3000 level for now. The pair has been under relentless assault from the sellers since yesterday after UK PM May barely survived her Brexit proposal vote in Parliament. The newly watered down UK proposal hampered by amendments from euro-skeptics in her party is unlikely to get even a cursory look in Brussels as it calls for UK to retain control over its trade regulations.

Today’s troubles, however, were decidedly economic based as core inflation fell more than market forecast to 1.9% from 2.2% eyed. Despite the fact that inflation fell below the BOE 2% target, the market remains convinced that the UK central bank will begin to hike rates in August as part of its attempt to begin policy normalization. The futures markets barely budged in post news reaction to the numbers with a probability of rate hike remaining at 75%.

The hike from BOE will likely be one and done, but for now that sentiment was enough to hold cable above the 1.3000 figure for now. Still whether it is able to hold that barrier will depend on North American flows and the 2nd day of testimony for Fed Chairman Powell. Mr. Powell’s upbeat view of the US economy helped boost the dollar yesterday and throughout overnight trade as markets have basically decided to “not fight the Fed”. Still there is a long history of Fed testimony being slightly altered in 2nd day of hearings and if Mr. Powell shows and oscillation with regard to US economic growth the anti-dollar trade could rally. For now EURUSD has support at 1.1600 while cable holds above 1.3000, but if Powell is resolutely hawkish both of those levels could give way as the day proceeds.