YESTERDAY’S drop in the consumer price index (CPI) inflation figure for March, from 4.4 to 4 per cent, surprised the markets. This sent sterling tumbling as expectations of a May rate rise evaporated. Weak retail figures compounded the gloomy outlook for the pound.
Many traders seem to have been tipped off prior to the announcement, as rumours of the 0.4 per cent drop did the rounds. “This helped sterling-dollar slide some 50 pips to $1.6290 by the time the rumours were in fact confirmed at 9.30am. The weak figures then sent sterling-dollar crashing another 63 pips to a low of $1.6227, before stabilising around $1.6260,” says Ian O’Sullivan of Spread Co. As a result, the UK’s currency took a dive, rebounded and fell again – with bears selling sterling off across the board.
Even though inflation is running at double the Bank of England’s (BoE) mandate, this drop is expected to strengthen the doves on the monetary policy committee (MPC). Michael Hewson of CMC Markets believes these inflation figures “certainly make a rate rise at next month’s May meeting much less likely.” Richard Wiltshire of ETX Capital believes market expectations of a May hike have dropped from 55 to 20 per cent, while Richard Driver of Caxton FX thinks market consensus is now pointing towards an August rate rise.
Sterling’s dip is also down to weak economic data. “With UK economic figures still very inconsistent, evidenced yesterday morning by poor retail sales, we can expect sterling to underperform this month,” says Driver. Wiltshire thinks despite the CPI data, “the obvious weakness in UK consumption could be the greater catalyst for a medium term sell off in the Queen’s currency.” Rishi Patel of Fair FX adds: “We still need to consider the bigger picture. Later this year we will see the high energy prices filter through to household bills”.
Most commentators are still cautious about inflation. Alistair Cotton of Currencies Direct argues: “When the BoE talked about temporary factors pushing the inflation rate up, they were talking about commodity and import prices, not food retailers slashing margins. This brief dip could be temporary as well.” Angus Campbell of London Capital Group concludes that with “the prospect of high inflation, low interest rates and sluggish growth, sterling is not a particularly attractive currency at the moment.”
The BoE is running a procyclical monetary policy behind the curve of every other central bank, excepting the deflated Japan and the inflation-exporting US. The markets think these new figures could lead King and other doves on the MPC to feel vindicated in their loose monetary stance. If this turns out to be the case, expect sterling to suffer further.