FTSE gains as inflation drags pound lower

A weaker than expected CPI reading lessened the pressure on the BoE, thus dragging the pound lower. This sterling weakness, coupled with wider risk appetite, is helping the FTSE to gain ground

• FTSE continues to benefit from return to risk assets

• UK inflation lessens pressure on BoE to act

• UK sets out baseline customs union plans

The FTSE is back in the green today, in what looks like a potential third day of gains in response to last week’s doom and gloom. The risk-off trade has well and truly been left behind us, with gold down over 1% on the week so far. It is the Japanese markets which will likely continue to be the main benefactor from this shift back into risk, as the appetite for equities, coupled with the devaluation of the haven yen provides a double whammy effect on the Nikkei and Topix. With UK CPI falling on a monthly basis, the lessening pressure on the BoE to raise rates has dragged the pound to a one-month low, helping to accelerate early FTSE gains.

UK inflation has confounded market expectations, remaining at 2.6% in July. Much of the downward pressure on prices came thanks to a decline in motor fuel prices, which was largely offset by rising clothes, utilities, and food prices. However, with the core reading remaining at 2.4%, it is clear that the UK is not wholly reliant upon falling energy prices to curb the rise of inflation. This price stabilisation provides at least some form of reprieve for consumers, with the deterioration in real wages easing back over recent months.

The UK has set out the first of its 12 Brexit position papers, with today’s customs union framework setting out a plan to ask for a temporary customs union after the UK leaves the EU in 2019. This essentially means that the UK wants to enjoy the benefits of the EU while putting together trade deals with the rest of the world. It is clear that by laying out the best case scenarios from negotiations, the UK Brexit team has essentially provided their opening gambit, with the ultimate resolution likely to be widely different from the suggestions in the forthcoming documents.

Ahead of the open we expect the Dow Jones to open 28 points higher, at 22,022.