Key takeaways
• UK CPI inflation rises in line with expectations as the latest energy price cap increase feeds through to household bills
• Strong US industrial production data offers little support to the dollar ahead of the latest Fed minutes
• Lane describes Euro Area growth as ‘not too bad’, but tighter policy still poses risks to the outlook
• UAE suspends trade and financial links with Iran as regional tensions escalate
UK CPI inflation rises in line with expectations as the latest energy price cap increase feeds through to household bills
UK CPI inflation figures for July were broadly in line with consensus forecasts. The headline rate rose to 2.9% year-on-year from 2.6% in June, while core inflation remained unchanged at 2.6%.
The primary driver of the increase in headline inflation was the rise in the energy price cap, which added around £221 to the average annual household bill, equivalent to approximately 13%. Clothing and footwear inflation returned to positive territory after recording a negative annual rate in June, contributing to both headline and core inflation alongside increases in healthcare and household goods prices. By contrast, transport costs and food prices exerted a more moderating influence than in the previous month.
These figures are not a big threat in terms of prompting a hike from the Bank of England. Without the influence of higher energy prices, regulation and government diktats, there appears little, if any, domestic upward influences on inflation, in my opinion.
The elevated levels of GBPUSD and GBPEUR may face increasing challenges given the pressures that lie elsewhere because of rising yields (government finances, capital investment projects, mortgage finance etc).
Strong US industrial production data offers little support to the dollar ahead of the latest Fed minutes
US industrial production rose by 0.2% month-on-month in July, following an upwardly revised 0.3% increase in June. Capacity utilisation also edged higher to 76.3%. While the data exceeded expectations, market reaction was limited.
Elsewhere, pending home sales fell by 2.3% month-on-month in July after declining 4.8% in June. Higher Treasury yields continue to weigh on personal financing conditions.
Today sees the release of the Fed FOMC meeting minutes for the July meeting. These are unlikely to reveal anything material regarding the prospect of higher interest rates at upcoming decisions, given the Fed Chair Kevin Warsh’s aversion to ‘forward guidance’.
The USD remains under pressure, but the vast bulk of the negativity appears more than built in now, in my view.
Lane describes Euro Area growth as ‘not too bad’, but does the ECB risk weaker growth?
ECB Chief Economist Philip Lane recently described Euro Area growth as “not too bad”. However, these comments, perhaps given so as to prepare the ground for a further hike in ECB interest rates in September, don’t offer the comfort that they were perhaps meant to convey.
Interest rates in the Euro Area have recently been lower than in several major economies, both in nominal and real terms. Even so, economic activity remains subdued. That raises questions about how much additional policy tightening the region can absorb without placing further pressure on growth.
Should the ECB opt for further rate increases, downside risks to economic activity could intensify. Higher borrowing costs would add another headwind to those beyond the control of the ECB, at a time when growth momentum already appears modest.
Any policy-driven support for the euro through narrower interest rate differentials could add to pressures on exporters, particularly while US tariff risks are elevated. For now, the ECB faces the familiar challenge of balancing inflation risks against a fragile growth outlook.
UAE suspends trade and financial links with Iran as regional tensions escalate
The United Arab Emirates announced the suspension of trade, commercial exchanges and financial transactions with Iran until further notice, citing Iranian escalation.
The move follows reports that Iran launched two ballistic missiles towards its territory, targeting shipping routes. According to UAE authorities, neither missile struck its intended target and both fell into the sea. Iran has denied the allegation.
This represents a further increase in regional tensions, although financial markets have so far not responded. Oil prices and major currency markets have shown no reaction, suggesting investors await fresh news on negotiations or escalation from the US.
Credit to MoneyCorp