Pound firmer after UK inflation data
Sterling has extended its gains against both the dollar and the euro following this morning’s UK inflation data for April. They were firmer than the consensus forecast, albeit headline inflation fell sharply last month, and the market has pared back considerably the chances of a Bank of England rate cut at next month’s monetary policy meeting. The pound has strengthened to around $1.2740 against the dollar and is trading at about 85.2p against the euro, with the latter not much changed against the US currency at around $1.0850.
UK government bond yields have spiked a good bit higher on the back of the inflation data, with 2-and 10-year yields increasing by around 10-12bps at the start of play today, while German and US yields are also nudging up again having closed lower yesterday. Meanwhile, in equity markets, the S&P 500 closed at a new all-time high on the back of modest gains of around 0.25%, while European stocks earlier finished about half a percent lower on the day.
As for the UK inflation data, the annual headline rate came in at 2.3% in April, down sharply from 3.2% in March but slightly ahead of the consensus forecast of 2.1%, with energy prices falling and food price inflation moderating further. Core inflation, which excludes energy and food prices, eased to 3.9% last month from 4.2% in March, but again this was ahead of expectations for a decline to 3.6%. Within core, goods price inflation fell further and now stands at just 0.6%, but services inflation – and this is what will probably concern the Bank of England – remained sticky and elevated, coming in only marginally lower than in March at 5.9% and well ahead of the expected 5.4%.
It was good to see Christine Lagarde come to Ireland to all but announce a cut in interest rates next month. She said she is “really confident” inflation is returning to the 2% target and there is a “strong likelihood” rates will be cut in June, though she refused to commit to any particular path for rates beyond June.
Fed member Waller says “recent data on the economy indicate that restrictive monetary policy is helping to cool off aggregate demand and the inflation data for April suggests that progress toward 2 percent has likely resumed,” but adds that he “would need to see several more months of good inflation data before I would be comfortable supporting an easing in the stance of monetary policy.”
It is quiet on the economic data front for the rest of the day, with new homes sales in the US the only release of note, while the Fed publishes the minutes of its most recent monetary policy meeting.