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FX round-up: Sterling widely lower after softer-than-expected UK CPI inflation

By Andrew Schonberg

Date: Tuesday 14 Feb 2017

FX round-up: Sterling widely lower after softer-than-expected UK CPI inflation

(ShareCast News) - Softer-than-expected UK inflation data for January knocked sterling widely lower on Tuesday, while the dollar limped higher after US Federal Reserve chair Janet Yellen testified before the Senate banking committee.
At 17:11 GMT, sterling was down 0.54% to $1.2458, and down 0.27% to €1.1787.

The dollar-spot index was up 0.33% to $101.290. The British unit was also softer versus the currencies of Australia, Canada, New Zealand and South Africa, but up on Japan's.

Earlier, Office for National Statistics revealed UK's consumer-price index (CPI) rose 1.8% in January, which was below the 1.9% expected by the market. Bank of England's (BoE) target is 2.0%.

Michael Hewson, chief market analyst at CMC Markets UK, said the CPI print to some extent reinforced the recent dovishness seen in the latest quarterly inflation report.

"The market reaction does rather ignore the fact that PPI (producer-price index) input prices jumped more than expected," he added.

"The broader question here is how much of these rising costs will get absorbed within the supply chain and how much will eventually trickle down into consumer's pockets."

He said the probability of higher inflation remained a concern, with sterling's outlook likely dictated by expectations about the prospects for future rate rises.

London Capital Group senior market analyst Jasper Lawler added BoE policymakers were almost certain to wait until after article 50 was triggered -- beginning UK's exit from the EU -- before thinking about hiking rates.

"Still, it (the CPI print) is likely just some temporary relief for central bank doves. Oil prices bottomed in January of 2016 so from here on in the 'base effect' in year-over-year inflation data means oil will add to, not detract from price rises."

Meanwhile, the greenback turned in a mildly positive performance on key crosses after Yellen's testimony. It was up versus the euro, aussie, loonie, kiwi and yen, but down against the rand.

SpreadEx financial analyst Connor Campbell said Yellen largely maintained the same tone seen in the Fed's January meeting, claiming a rate hike would be appropriate if inflation and wage growth matches its current expectations.

Yellen also hinted that US President Donald Trump's fiscal policies could change the course of the Fed's 2017 journey.

Others in the market, such as Pantheon Macro chief economist Ian Shepherdson, summed up Yellen's testimony in one line: "No real surprises; waiting for clarity on fiscal policy."

Hewson added that US bond yields also jumped sharply across the curve with the 10-year yield hitting 2.5% for the first time since the beginning of the month, and before the weak wages data seen in the January employment report.

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