Premature to read too much into today's UK CPI report

Global Currency Strategy Team at Brown Brothers Harriman & Co. (BBH) looks into today’s mixed UK inflation figures and provides a brief outlook for the GBP/USD pair.

Key quotes:

“The UK reported December prices today. Headline CPI was in line with expectations, rising 0.4% on the month, which saw the first decline in the headline rate (to 3.0% from 3.1%) in six months. The core rate eased a little more than expected. The 2.5% y/y rate is the lowest in five months. Service inflation also fell to 2.5%, which is a nine-month low.”

“Given the re-weighting of airfare, it may be premature to read too much into today's report. Many, including ourselves, continue to look for the past decline of sterling to drop out of the comparisons, which would point to a general easing of price pressures. Also, a favorable dynamic was apparent in producer prices, where input prices slipped more than expected while output prices were firmer than expected, which speaks to margins.”

“Separately, news reports suggest that the EU has toughened its demands for a transition deal. The negotiators were given more specific terms that will complicate the talks. The UK is being asked to adhere to EU rules on immigration and rights of EU citizens to live in the UK during the transition, as well as agree to no new trade agreements and no renegotiating fishing rights during the transition. In essence, these latest conditions appear to make more concrete what a "standstill" transition means.”

“Four sessions ago, sterling was fraying support seen near $1.35. Yesterday, it saw $1.3820. Recall that $1.3805 is the 61.8% retracement of sterling's drop following the 2016 referendum, and $1.3885 is the 38.2% retracement of the decline since the 2014 peak a little shy of $1.72. Sterling has slipped to nearly $1.3740 in the European morning. Support is seen in the $1.3680-$1.3700.”

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