Sterling gains some ground

Sterling has gained some ground on the back of hawkish Bank of England commentary, which has prompted the market to pare back a bit the chances of an interest rate cut next month, with UK GDP data released earlier this morning also providing some support. The pound is currently trading at about 84.2p versus the euro, not far from its circa 2-year high of just under 84p reached in mid-June, and is more than half a cent higher against the dollar from yesterday morning at $1.2870. The euro is not much changed against the US currency trading at around $1.0840.

French bond yields fell yesterday, more or less reversing Tuesday’s increase, amid a decline in European yields generally. French stocks closed in the black, reversing a good portion of the previous day’s losses, as European equities rallied quite strongly (gaining more than 1%). In the US, Treasury yields ended marginally lower on the day, while the S&P 500 added around 1%.

Bank of England Chief Economist Pill says that, “at annual rates of not far from 6%, services inflation and wage growth continue to point to uncomfortable strength in underlying inflation dynamics” in the economy, adding that the challenge for the Bank is “to get the balance right: enough monetary policy restriction to achieve the 2% inflation, but neither too much or too little for fear of destabilising the economy”. While he concedes that the next move in interest rates is likely to be down, the market has pared back the chances of a cut next month to just over 50/50.

Data published earlier this morning shows GDP in the UK rose by a stronger than expected 0.4% in May, having been flat in April, with output gains seen across manufacturing, construction and services. Over the three months to May, GDP was up a healthy 0.9% on the three months to February.

In his second day of testimony to Congress, Fed Chair Powell said that, while he does “have some confidence” that inflation is receding, he’s not prepared to say he is “sufficiently confident that it’s moving sustainably down to 2%” (which would allow the Fed to lower interest rates).

As France struggles to form a government following Sunday’s election results, the head of the Bank of France has warned that the country cannot afford to keep increasing its deficit or burden its companies with more taxes and costs.

The key economic data release today is the CPI inflation report for June in the US. The consensus expects headline and core consumer prices to have increased by 0.1% and 0.2% month-on-month respectively – outturns that would please the Fed – resulting in the annual rate of headline inflation dipping to 3.1% from 3.3% in May and leaving the annual core rate unchanged at 3.4%.

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