Post date: 19/02/2018 08:00
Last Tuesday’s inflation data further ramped up speculation that the Bank of England could be ready to raise interest rates again in the coming months. Despite a slowdown in food prices, headline inflation stood firm at 3.0% in January after the market had anticipated a decline to 2.9%. Of concern to the Bank of England will be the increase in the rate of core inflation. Core inflation, of which strips out of the volatile components of food and energy, accelerated back to 2.7% from 2.5%, still comfortably above the central bank’s 2% target level. This reinforces our view that the BoE will raise interest rates again at its May meeting, when it releases its next set of economic projections as part of its quarterly Inflation Report. Last week however sterling still continued to tumble, despite Wednesdays speech from Boris Johnson to try and brand together and tackle Brexit with positivity.
The single currency didn’t have a bad start to the week but ended on a downslide on Friday, weakening against the entire G10 during a rally in the global bond market. Despite unwind of the bond selloff seen earlier in the month, observable causes for this euro weakness were hard to find. Politics in Europe remain steady, with Macron’s approval rating dropping to the lowest point since he got elected, and the Italian elections heading for a messy climax as opinion polls point to no clear winning coalition.
The US Dollar continued to weaken against its major peers on Thursday, extending a torrid run that has now seen the currency hit fresh three year lows and shed over 6% since mid-December alone. Investors mostly overlooked Wednesday’s lofty inflation numbers that suggested that Federal Reserve could be on course to raise interest rates on as many as four occasions in the US in 2018. So what factors have been behind this recent sharp downtrend? Concerns this week appear to have shifted towards the country’s growing current account deficit. Recent tax cuts from the Trump Administration are expected to fuel domestic demand in the US. While this should foster higher growth, it may have the unwanted side-effect of worsening the balance of trade and swelling the current account deficit - often a key consideration for investors during periods of market stress.