Sterling Slides on Weak Inflation Data

The sterling fell after weaker than expected inflation in the UK reduces expectations of a rate hike by the Bank of England.  

EUR, GBP & CHF: GBP more vulnerable as expectations of BoE rate hike falls

• The GBP fell to its weakest level against the EUR in 10 months. UK’s headline inflation in July remained unchanged at 2.6% but down from a peak of 2.9% in June and missing expectations. This reduces the probability that the Bank of England will hike rates this year, potentially removing a key support for the sterling.

• Citi analysts believe that investors will pay little attention to the minutes of the latest European Central Bank (ECB) meeting, which would be available today. Instead, investors are likely to look to ECB President Draghi to provide more details on the bank’s tapering decision and interest rate policy at the Jackson Hole meeting in August. Any signal by the ECB of its intention to reduce asset purchases is likely to be supportive of the EUR.

USD & JPY: Strong US July retail sales lifts USD

• The USD rebound gains further traction overnight against the JPY as North Korea’s deadline to launch missiles over Guam passes without incident. At the same time, decent US July retail sales numbers helped the USD post moderate gains against the rest of the G10 currencies. US July headline retail sales rose 0.6%, beating expectations and the June figure was revised up from -0.2% to +0.3%.

• Geopolitical risks may escalate again when the US commences military exercises with South Korea on August 21 but investor attention is likely to focus on the minutes from the Fed’s latest meeting for now. Citi analysts believe that the dollar could be negatively impacted if the minutes reveal less confidence that the recent slowing in inflation is “transitory”. Any indication that the Fed may delay its balance sheet reduction and/or comments that indicate there is little desire to raise rates to counter rich asset prices may also weigh on the USD. Citi analysts see the EUR and JPY as key beneficiaries if the USD weakens.

Commodity Bloc: RBA Minutes reiterate concerns about AUD strength and high household debt

• The latest minutes from the Reserve Bank of Australia’s board meeting indicate that the high level of household debt and the stronger AUD remain as key threats to Australia’s economic outlook.  

• Geopolitical tensions may be fading but both AUD and NZD remain vulnerable with their respective central banks likely to talk the currency down. Citi analysts prefer positioning for a weaker AUD and NZD against the EUR and JPY.

• Canada’s inflation reading for July is due on Friday. With the markets currently pricing in only two rate hikes by December 2018, there is upside risk for the CAD if inflation beats expectation.

Asia EM: CNY & SGD - Limited gains against USD

• Despite gains in the CNY this week, Citi analysts still expect the CNY to remain range bound for the rest of 2017.

• USDSGD has tested the 1.3550 level several times over the last couple of weeks but Citi analysts expect the USDSGD to move higher. 

This is an extract from the Daily Currency Update, dated 16 August 2017. Please approach a Citigold Relationship manager if you would like more information.