Dr. Nektarios Michail
HotForex
On the announcement of the January CPI results, Sterling jumped 66 pips, with the market interpreting the lower than expected price growth as a positive signal for the UK economy. In particular, the overall idea is that lower price pressures are a sign that the UK economy is finally adjusting to its post-Brexit path. However, this is not the case. In fact, what the inflation results underline is the UK economy’s reliance on the exchange rate and the fact that high prices persist in the economy.
Let’s start with the 0.3% reduction in headline CPI inflation, contrasted with the core (i.e. excluding food and energy) inflation rate remaining at 1.9%. This, first and foremost, suggests that only the food and energy parts were affected and thus there has been no effect from the real economy.
The same holds for the RPI, which is the index many goods in the UK economy are linked to. To explain the decline all we have to employ is the exchange rate and the price of Oil. In particular, the GBPUSD exchange rate averaged at 1.258 in January 2019, 9% lower than the 1.382 rate that persisted a year ago, attributed to the interest rate differential between the two countries. In contrast, the price of Oil stood at $57.5 in January 2019 and $66.8 in January 2018, or a 13.7% decrease. Overall, a barrel of Oil would cost GBP 45.71 in January 2019, compared to GBP 48.33 in the same month last year. Thus, Oil costs would decrease by 5%, which, considering Oil’s weight in the RPI, would result in an overall decrease in prices by about 0.19% – which is almost exactly the rate at which the RPI declined since last year.
Overall, there appears to have been no improvement stemming from the UK itself as the observed changes are linked to the price of Oil and the exchange rate. At the moment, markets appear to have understood this, as prices moved back below the 1.2919 Resistance level, currently trading around the 1.29 level. If that Support level is broken then the next move should be towards the 1.2832 level (Fib. 0.0%).
Disclaimer: Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of purchase or sale of any financial instrument.
Recommended Content
Editors’ Picks
AUD/USD stands firm above 0.6500 with markets bracing for Aussie PPI, US inflation
The Aussie Dollar begins Friday’s Asian session on the right foot against the Greenback after posting gains of 0.33% on Thursday. The AUD/USD advance was sponsored by a United States report showing the economy is growing below estimates while inflation picked up. The pair traded at 0.6518.
EUR/USD mired near 1.0730 after choppy Thursday market session
EUR/USD whipsawed somewhat on Thursday, and the pair is heading into Friday's early session near 1.0730 after a back-and-forth session and complicated US data that vexed rate cut hopes.
Gold soars as US economic woes and inflation fears grip investors
Gold prices advanced modestly during Thursday’s North American session, gaining more than 0.5% following the release of crucial economic data from the United States. GDP figures for the first quarter of 2024 missed estimates, increasing speculation that the US Fed could lower borrowing costs.
Ethereum could remain inside key range as Consensys sues SEC over ETH security status
Ethereum appears to have returned to its consolidating move on Thursday, canceling rally expectations. This comes after Consensys filed a lawsuit against the US SEC and insider sources informing Reuters of the unlikelihood of a spot ETH ETF approval in May.
Bank of Japan expected to keep interest rates on hold after landmark hike
The Bank of Japan is set to leave its short-term rate target unchanged in the range between 0% and 0.1% on Friday, following the conclusion of its two-day monetary policy review meeting for April. The BoJ will announce its decision on Friday at around 3:00 GMT.