FX markets came alive today. Sterling had barely budged overnight and the GBP/USD cross was steady around 1.315 until 09.30 when it shot past 1.32 following the release of far stronger-than-expected UK CPI-inflation data for August. The consensus forecast was that a reasonably steady currency and still weak wage inflation in the UK had cut core CPI-inflation to 1.8% yoy from 1.9% yoy in July which had in turn lowered headline inflation to 2.4% yoy from 2.5% yoy. Instead core and headline CPI-inflation jumped to 2.1% yoy and 2.7% yoy, a 6-month high, prompting markets to reconsider the possibility that the Bank of England could hike rates again before year-end.
But those gains were short-lived, with GBP/USD falling to as low as 1.312 following reports that Prime Minister May would reject the EU’s revised solution to the post-Brexit Irish border problem. Markets eventually found their footing, with GBP/USD back up to where it had started the day, but it is clear that Sterling’s sensitivity to UK macro data and in particular Brexit-related headlines is running high. Prime Minister May and other EU leaders are currently meeting in Salzburg for a 2-day Summit where the past and future progress on Brexit negotiation is topping the agenda.
The Aussie and Kiwi Dollars made stronger and more steady gains today, with markets seemingly comforted by the fact that the US had introduced tariffs of “only” 10% on another $200bn of Chinese imports while China’s retaliatory response had been limited to 5-10% tariffs on “only” $60bn of US imports. Both sets of tariffs are due to kick in on 24th September and this trade-war between the world’s largest trading nations may well be far from over.
