Published: February 18th, 2020
– After flirting with the 1.30 level for almost a week, the pound summoned the courage to get to the mark. Market insiders think that the U.S. Consumer Inflation Index which was released on Thursday, February 13, could have had a hand in this slight non-sideways movement.
The second week of February was rather uneventful for Great Britain. With not much happening that could have swayed the exchange rate of USD/GBP to act like it is doing, currency market analysts thought the U.S. consumer inflation data may have nudged the pound to surge above the greenback.
At the close of the week, the pound stood at $1.30 and mostly swaying around the $1.305 mark. This happened after the U.S. Labor Department announced that the Consumer Price Index (CPI) had risen 0.2% in January following another 0.1% rise in December.
Though this data is devoid of the volatile energy and food figures, it still shows a cumulative increase of 0.2423% for the month in question. Experts say that an increase in airline ticket prices, the cost of education and recreation, and healthcare contributed to the inflation in January.
The core CPI has increased by 2.3% between February 2019 and January 2020, rising by a similar margin for four months in a row.
Currently, the Federal government has set up an inflation target of 2%. It uses the personal consumption expenditures (PCE) index to gauge the deviation from the target. The said core PCE index rose to 1.6% year-on-year in December, undershooting the target. Right now, the markets have trained their eyes on the Department of Labor waiting for it to release the January figures later in the month.
Despite inflation surpassing the set targets, the Federal Reserve chair has appealed for calm. While testifying before Congress two weeks ago, Powell said that the economy was in a great place and performing exemplarily.
He has since recanted these claims, admitting when he resumed his testimony before Congress on Wednesday that the U.S. economy was currently in a sad state. Powell added, to the dismay of house representatives, that the economy of the world’s wealthiest country was not civilized enough to survive the conditions of a normal monetary policy without self-destructing.
Last month during the monthly monetary policy meeting, the Federal Reserve decided to leave the interest rates as they were. Further, the central bank is expected to maintain the current rates after slashing them three times in 2019.
The overall January CPI data may have been restrained by the receding gasoline prices. In January, the gasoline prices slumped 1.6% following a 3.1% rise the month before. As a result, the CPI only edged 0.1% in January after a 0.2% increase in three straight months.
Following the 2.3% leap in the CPI, the cumulative rise since February 2019 now stands at 2.5%, which is the steepest since October 2018.
The rise of the Sterling Pound was additionally sparked by the U.S. Commerce Department data on consumer spending. This information showed that sales had slumped again in January following the dips recorded in December.
Clothing stores recorded the biggest decline which translated to an 11-year low. Generally, the U.S. retail sales index was flat for January after a slight surge of 0.2% in December. This data, however, is exclusive of the automobile sales, food services, gasoline, and transactions covering building materials.
Still, the data fall short of the projections. Economists had predicted that December sales will rise by 0.5% while January was to record a surge of 0.3%.
The flat readings of January indicate that consumer spending still is on a downward trend after the momentum dropped in Q4 of 2019.
Auto sales were up by 0.2% after tanking 1.7% in December. The sales of electronics and appliances, on the other hand, fell by 0.5%. Building materials stores recorded gains of 2.1% in sales, which is the highest figure since August.
In a separate set of data released by the U.S. Department of Labor, the import prices did not move in January. The data suggests that the slump in gasoline prices could have canceled out the gains recorded in motor vehicle sales as well as the price of capital goods. These figures are a slight migration from the 0.2% rise recorded in December.
The data from the various U.S. departments have weighed down on the greenback. The pound now seems like the sole beneficiary. However, it too is not completely out of a rough patch. The demons of Brexit still linger. Besides, the resignation of Sajid Javid, the U.K. Finance Minister yesterday following a face-to-face confrontation with Prime Minister Boris Johnson has sent shock waves into the market.
Johnson ordered Javid to fire the entire top brass at his ministry to ease the process of merging his unit with the prime Minister’s office.
The resignation threatens to delay not only the Brexit process but also the budget.
Markets have been pushed into a state of worry which stems from the understanding that changing the in-charge at the finance ministry may slow the implementation process of Brexit. Already, the Brexit schedule is tight as it is. Any further delays could put the U.K. in jeopardy.
The U.S. consumer price index data for January helped the Sterling Pound to gain some ground over the greenback. While this may be temporary, there is not much indication, going by the predicted inflation figures, that the dollar may get some reprieve. The only hope of the American currency rising in the short-term depends on how badly the U.K. government handles the transition in its finance ministry following the shock resignation of minister Sajid Javid. A smooth transition, notwithstanding, it may take a while before the dollar assumes an upward trajectory.