Sterling firmer post UK inflation data

Sterling is slightly firmer after the release of this morning’s UK CPI inflation data for June, which came in a touch stronger than expected and may dampen the chances of a Bank of England interest rate cut next month.  The pound is trading just shy of the $1.30 level against the dollar at $1.2990, while EURGBP has slipped back below the £0.84 level to £0.839. The euro is largely unchanged against the dollar from yesterday morning, trading a little above $1.09.

There was a broad-based decline in government bond yields yesterday, despite stronger than expected US retail sales data, with US, German and UK yields all ending lower. In equity markets, European stocks had another poor session, shedding around 0.7%, while US indices advanced with the S&P 500 adding 0.6% to close at a new all-time high.

Headline and core CPI inflation in the UK were unchanged in June at 2.0% and 3.5% respectively according to this morning’s release (a small decline in both had been expected), with core goods and core services inflation both unchanged at -0.1% and 5.7% respectively. The market has pared back the chances of a Bank of England interest rate cut at the August meeting to around 35% post the data (from 50% or so).

Retail sales in the US were flat in nominal terms in June, versus expectations for a fall of 0.3%, while the May outturn was revised up slightly. The underlying picture in the month was stronger than the headline reading suggests though, with core retail sales (i.e. excluding autos and gasoline) up almost 1%. However it remains the case that spending has stepped down a gear so far this year, from the strong pace of growth in 2023.

Economic data due today include a final CPI inflation reading for June in the Euro area – the flash reading showed headline and core inflation at 2.5% and 2.9% respectively – while industrial production and housing starts are due in the US. The Fed also publishes its latest Beige Book, while there are a couple of Fed members are due to speak as well.