Forex: GBP/USD: UK inflation eases, wage growth continues to lag price increases

on Sep 17, 2013

**, Tuesday 17 September:**

Year-on-year UK CPI for August showed a slowing pace of price increases from the prior 2.8 percent to a rise of 2.7 percent, as expected. UK inflation decelerated slightly as transportation prices and costs for clothing rose by less than a year earlier. On a monthly basis consumer prices posted growth of 0.4 percent, marginally below the forecast for 0.5 percent, yet well above July’s flat reading. The Core CPI indicated annual inflation of 2 percent, identical to July’s, falling short of analysts’ estimate for an uptick of 2.1 percent.

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However, the UK Retail Price Index y/y reported an accelerating pace of price increases compared to July’s 3.1 percent with an actual escalation of 3.3 percent. Analysts were picking a modest rise of inflation to 3.2 percent. The RPI is used in wage negotiations and is a basis for the inflation-linked bond market. UK wage growth continues to lag behind inflation and households have seen their real incomes shrink since the recession as a result of the Bank of England’s policy of keeping rates at a record low.

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In a separate report today, the statistics office said that input producer prices m/m declined by 0.2 percent, whereas the median economists’ prognosis was for a rise of 0.3 percent, following the prior surge of 1.2 percent. Month-on-month factory gate prices in August increased by just 0.1 percent, compared with July’s upswing of 0.2 percent, which was expected to persist.

Following the inflation report, the GBP/USD retreated from the intraday high of 1.5936 and reached a new low for the day at 1.5885. However, the pressure from bears proved to be ephemeral and sterling recovered the losses by the end of the European session.

Since the financial crisis the pound has shown the strongest correlation to the loonie, amongst the major pairs. Even the neighbouring EUR/USD does not move in tandem with sterling to the degree the relationship between the CAD/USD and GBP/USD has shown over the last 3 years (see left chart above). The strength of the pound since July has foreshadowed US dollar weakness against its Canadian peer in the last month. However, this juxtaposition of the currency pairs indicates that sterling may not sustain the recent rally if the CAD/USD does not break the downtrend that started last September.
Right now, the GBP/USD is trading around 1.5902, up 0.03 percent intraday.
In the US, Core CPI for August m/m is due out at 13.30 BST, with market consensus for a rise of 0.1 percent compared to a 0.2 percent increase in July. The headline change of consumer prices is expected to show a rise of 0.2 percent, identical to the prior period.


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