- UK inflation drops to 3%
- German inflation levels also dropped
- US Dollar continues to feel the pressure
By Joe De Berniere
UK Inflation falls
UK inflation dropped for the first time since June, mainly because of the impact of air fares. It dropped from November’s 3.1% - a six year high to 3% in December and this was widely expected. A rise in air fares and drop in the price of toys and games being responsible. The bank says inflation peaked at the end of 2017 and will fall back to its 2% target this year. The response to this news has been mixed. On the one hand, a drop in consumer inflation relieves pressure on the British consumer, which could, in turn provoke increased spending and foster growth. On the other hand, hopes of a BoE 2018 rate hike are now unsettled as the falling UK Consumer Prices Index could push central banks further away from hawkish intentions.
German Inflation drops, worrying Euro
In Europe, Germany’s inflation levels dropped to 1.7% yesterday due to easing energy prices. Adding to these concerns are the breakdown in coalition talks between Angela Merkel’s Christian Democratic Union and the Social Democratic Union. This has stoked worries that Germany will be left without an effective government until a flash election is called. This is pertinent because another election would prompt even more uncertainty for the bloc and therefore hurt the Euro.
US Dollar under pressure
The US Dollar is still continuing to feel the pressure. GBPUSD is still flirting with 1.38 - the highest since the June 2016 referendum and the Euro is the highest since December 2014 versus the dollar. The weakness doesn’t have a very obvious cause but it’s probably a combination of cautiousness over the Federal Reserve’s interest rate hike plans, higher commodity prices and fears that the North American Free Trade Agreement (NAFTA) may fall. Charts suggest that the US Dollar looks oversold and that a correction is due.
Today we have US industrial production and Canada’s interest rate decision, where a hike is widely expected to go to 1.25% from 1%.