UK inflation beats, EZ construction sinks

Cable moved to session highs before handing it all back after a forecast-beating inflation print that takes some of the pressure off the Bank of England to cut rates. Inflation hit 1.8% in January, rising from 1.3% in December and ahead of the 1.6% forecast. There is a lot of noise here and indeed all this week with a slew of UK data, none of which – except the PMIs on Friday – that tell us enough yet about the direction of the economy.

The bulk of the increase came from higher petrol prices and airfares falling less than they did a year before. It was the first increase in the pace of inflation for six months and backs up the MPC’s decision not to cut rates last month. However, this is not just an inflation question. We need to see whether the positive survey data in the aftermath of the Tory election win is maintained with PMIs this Friday offering a big test for sterling bulls. And we must see whether positive sentiment – soft data – translates into more positive hard data by way of GDP. Inflation remains below target but the BoE does not seem unduly concerned by this. What the Jan decision makes clear is that the majority of the MPC would prefer to keep their power dry vis-à-vis inflation as long as economic activity does not start to stagnate too much.

GBPUSD pushed up towards 1.3030 but the rally fizzled with little in the numbers to really indicate a change in direction by the BoE. The pair has now retraced the move, heading back through 1.30 again to 1.2980. The gravitational pull of this level will require some significant gear change in either the data, or more likely Brexit trade deal talks, to shake off. Range-bound.

Meanwhile disappointing Eurozone data keeps rolling in. Following the industrial production shocker, and German ZEW sentiment survey, the latest is a dismal construction output print, which came in at –3.7% in December year-on-year from +1.4% previously. Terrible but only underscoring the sluggishness in the EZ economy. Both EURUSD and EURGBP are vulnerable to further downside in the near-term although both pairs have eased off their lows of the day.

Elsewhere, bond markets are not joining the risk rally party today with yields sliding to session lows. That’ll be because of, er, monetary policy expectations, which is exactly what’s lifting markets in Europe to fresh all-time highs. Gold is reacting to this yield play as it should, shooting up to $1609.80 to within a whisker of the recent multi-year highs at $1611. USDJPY is pushing higher, breaking the near-term resistance at the Jan swing high at 110.20 to trade at session highs. With this level cleared we can now look to the May peak at 110.70 before a move back to the big 50% retracement at 112.70.