Economic Calendar

  • 9:30am UK Average Earnings y/y
  • 1:30pm US PPI m/m

Analysis

Sterling made strong gains on Tuesday as a stronger than expected inflation reading triggered renewed speculation over an increase in interest rates.

UK consumer prices rose 0.6% in August following a 0.1% decline the previous month. The year-on-year inflation rate increased to 2.9% from 2.6% compared with the 2.0% target and above consensus expectations of a 2.8% rate. The core CPI rate also increased more than expected to 2.7% from 2.4% while the RPI inflation rate strengthened to 3.9% from 3.6% previously.

There was significant upward pressure on food prices while the 4.6% annual increase in clothing and footwear prices was a record high.

The data increased expectation that the Bank of England would to raise interest rates and there were notable Sterling gains following the data. GBP/USD initially moved to 1.3250 while GBP/EUR hit a 5-week high around 1.1120.

GBP/USD advanced further to 12-month highs above 1.3300 on Wednesday as GBP/EUR held just above 1.1100 with EUR/GBP again testing the key 0.9000 level.

A stronger than expected reading for US job openings failed to trigger a major market reaction with EUR/USD finding support below 1.1950 as German bund yields increased.

Wednesday’s UK labour-market data will be watched closely on Wednesday with a particular focus over average earnings. A stronger rate of growth would intensify speculation over a tighter Bank of England monetary policy and increase the potential for further Sterling short covering ahead of Thursday’s policy decision.

The US producer prices data will be released on Wednesday, although most attention will be on Thursday’s consumer prices release.

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